<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 23, 1998
REGISTRATION NO. 333-42791
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NANOGEN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 3826 33-0489621
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
10398 PACIFIC CENTER COURT
SAN DIEGO, CALIFORNIA 92121
(619) 546-7700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
HOWARD C. BIRNDORF
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
NANOGEN, INC.
10398 PACIFIC CENTER COURT
SAN DIEGO, CALIFORNIA 92121
(619) 546-7700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
Copies to:
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THOMAS E. SPARKS, JR. DAVID J. SEGRE
ALLISON LEOPOLD TILLEY ROBERT M. TARKOFF
GEORGE A. GUCKER AMY E. REES
WILLIAM A. HINES ELIZABETH C. HEWITT
Pillsbury Madison & Sutro LLP Wilson Sonsini Goodrich & Rosati
P.O. Box 7880 Professional Corporation
San Francisco, California 94120-7880 650 Page Mill Road
(415) 983-1000 Palo Alto, California 94304
(650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
Issued , 1998
Shares
Nanogen, Inc.
COMMON STOCK
------------------------
ALL OF THE SHARES OF COMMON STOCK, $0.001 PAR VALUE OFFERED HEREBY ARE BEING
SOLD BY NANOGEN, INC. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET
FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL
PUBLIC OFFERING PRICE PER SHARE OF THE COMMON STOCK WILL BE BETWEEN $ AND
$ PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE
CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
------------------------
CONCURRENT WITH THIS OFFERING, SUBJECT TO CERTAIN CONDITIONS, BECTON, DICKINSON
AND COMPANY, HOECHST AG AND ELAN CORPORATION, PLC HAVE AGREED TO PURCHASE SHARES
OF COMMON STOCK FROM THE COMPANY IN A PRIVATE PLACEMENT AT A PRICE PER SHARE
EQUAL TO THE PRICE TO PUBLIC, FOR AN AGGREGATE PURCHASE PRICE OF $6.0 MILLION,
$10.0 MILLION AND $5.0 MILLION, RESPECTIVELY, PURSUANT TO EXISTING AGREEMENTS
WITH THE COMPANY. SEE "BUSINESS -- COLLABORATIVE ALLIANCES."
------------------------
APPLICATION HAS BEEN MADE TO HAVE THE COMMON STOCK APPROVED FOR QUOTATION ON THE
NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "NGEN."
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 7.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
--------------------- --------------------- ---------------------
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Per Share........................ $ $ $
Total(3)......................... $ $ $
</TABLE>
- ------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $900,000.
(3) The Company has granted the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an aggregate of
additional shares of Common Stock at the price to public less
underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in
full, the total price to public, underwriting discounts and commissions
and proceeds to company will be $ , $ and $ ,
respectively. See "Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to the approval of certain legal
matters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel
to the Underwriters. It is expected that the delivery of the Shares will be made
on or about , 1998, at the office of Morgan Stanley & Co.
Incorporated, New York, N.Y., against payment therefor in immediately available
funds.
------------------------
MORGAN STANLEY DEAN WITTER
LEHMAN BROTHERS
SBC WARBURG DILLON READ INC.
, 1998
NANOGEN LOGO
<PAGE> 3
THE NANOGEN SYSTEM
[Photo depicting instrument, disposable cartridge, semiconductor microchip and
cross-section of microchip]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
<PAGE> 4
ELECTRONIC ADDRESSING
Programming the Microchip
[Graphic depicting site by site electronic addressing]
An array of specifically bound DNA probes can be assembled or addressed site by
site, row by row on Nanogen's semiconductor microchip. A total of five sets of
different capture probes are electronically addressed to the microchip
illustrated above.
ELECTRONIC CONCENTRATION AND HYBRIDIZATION
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INTRODUCING THE TEST SAMPLE [Graphic depicting target DNA in solution
Add test sample containing target DNA to above test site on microchip]
microchip with DNA capture probes addressed
to test sites.
ELECTRONIC CONCENTRATION AND HYBRIDIZATION [Graphic depicting concentration of target
probes and hybridization to capture probes]
Apply positive electrical potential to
electrode at test site. The resulting
electric field in the solution concentrates
target DNA in the test sample at the test
site. Enhanced concentration of the target
DNA increases the rate of hybridization, or
binding, to the complementary DNA capture
probes.
FLUORESCENT DETECTION OF TEST RESULTS [Graphic depicting attachment of reporter
probes to captured target probe]
Apply negative electrical potential to
electrodes at test site. The resulting
electric field forces the sample DNA that is
not hybridized or incompletely hybridized
back into the test sample, leaving only
specifically hybridized target DNA at the
test site. Once hybridization is complete,
results are determined by scanning for
fluorescent dye-labeled reporter probes.
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<PAGE> 5
ELECTRONIC STRINGENCY CONTROL
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Electronic stringency control is used to [Graphic depicting perfect match and single
ensure the accuracy of the hybridization base pair mismatch]
process. As part of this process, a positive
electrical potential is applied to the
electrode at each test site. A perfect match
for the target is shown on the left; a
single base pair mismatch G:A (see insert)
is present on the right.
To eliminate these mismatches, a precise [Graphic depicting mismatch being driven
negative potential is applied. The mismatch away while perfect match remains bound to
DNA is forced back into the solution away capture probe]
from the test site in a matter of minutes.
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<PAGE> 6
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THE COMMON STOCK OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH
IT IS UNLAWFUL FOR SUCH PERSON TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH
PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary.................................................................... 4
Risk Factors.......................................................................... 7
Use of Proceeds....................................................................... 17
Dividend Policy....................................................................... 17
Capitalization........................................................................ 18
Dilution.............................................................................. 19
Selected Financial Data............................................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 21
Business.............................................................................. 25
Management............................................................................ 42
Certain Transactions.................................................................. 53
Principal Stockholders................................................................ 57
Description of Capital Stock.......................................................... 58
Shares Eligible for Future Sale....................................................... 61
Underwriters.......................................................................... 63
Legal Matters......................................................................... 64
Experts............................................................................... 64
Additional Information................................................................ 65
Index to Financial Statements......................................................... F-1
</TABLE>
- ---------------
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by an independent certified
public accounting firm and quarterly reports for the first three quarters of
each year containing unaudited consolidated financial information.
- ---------------
NANOGEN(TM) AND THE COMPANY'S LOGO ARE TRADEMARKS OF THE COMPANY. THIS
PROSPECTUS ALSO INCLUDES TRADE NAMES AND TRADEMARKS OF COMPANIES OTHER THAN
NANOGEN.
3
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and related notes appearing elsewhere in
this Prospectus. Except as set forth in the financial statements and notes
thereto or otherwise as specified herein, all information in this Prospectus (i)
assumes no exercise of the Underwriters' over-allotment option, (ii) reflects
the reincorporation of the Company from California into Delaware in November
1997, and (iii) reflects the conversion of all of the Company's outstanding
shares of Preferred Stock into 13,683,865 shares of Common Stock upon the
closing of this offering. See "Description of Capital Stock" and "Underwriters."
This Prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed below, as well as those discussed under "Risk Factors" and
elsewhere in this Prospectus.
THE COMPANY
Nanogen, Inc. ("Nanogen" or the "Company") integrates advanced
microelectronics and molecular biology into a platform technology with broad
commercial applications in the fields of medical diagnostics, biomedical
research, genomics, genetic testing and drug discovery. Nanogen's fully
automated system, which incorporates a proprietary semiconductor microchip,
provides a flexible tool for the rapid identification and analysis of any test
sample containing charged molecules. Through the use of microelectronics, the
Company's technology enables the active movement and concentration of charged
molecules to and from designated microlocations, or test sites, on the
semiconductor microchip. This electronic concentration of molecules greatly
accelerates molecular binding at each microlocation. In addition, Nanogen's
technology allows the simultaneous analysis of multiple test results, or
multiplexing, from a single sample. The open architecture design of the Nanogen
system enables the Company to offer microchips with arrays designed and built by
Nanogen for specific applications or with arrays that can be customized by the
end user. The Company believes its technology will accelerate the development of
products that capitalize on the increasing availability of genetic information
and its relationship to human disease. The Company further believes its
semiconductor based platform technology provides a low cost, highly efficient,
accurate and versatile integrated system that will shift the paradigm from
current manual and mechanical methods to microelectronic systems, thereby
significantly improving the quality of healthcare.
The Company has established corporate alliances in certain areas of
infectious disease diagnostics, drug discovery and genomics as part of its
strategy to expand the applications and accelerate the commercialization of
products derived from its technology. The Company is developing products to
expedite the diagnosis of infectious disease through its joint venture with
Becton, Dickinson and Company ("Becton Dickinson"). The Company has also entered
into agreements for the establishment of a collaboration and joint venture with
Hoechst AG ("Hoechst") to develop drug discovery tools, and a collaboration with
Elan Corporation, plc ("Elan") for genomic applications. In addition to their
commitments to provide research funding, these corporate partners have agreed to
purchase an aggregate of $21.0 million of Common Stock directly from the Company
in a private placement (the "Private Placement") to occur concurrent with this
offering. The Company's collaborations permit integration of the Company's
technology with the resources and technology of its partners, while allowing the
Company to independently pursue diagnostics, drug discovery and genomics
opportunities outside the scope of these collaborations.
The Company's commercialization strategy is to establish its platform
technology as the standard for molecular identification and analysis. Nanogen
will provide its products initially to leading research institutions and opinion
leaders to enable them to exploit the open architecture design in developing
additional novel applications. Concurrently, the Company is developing
commercial products in medical diagnostics, biomedical research, genomics,
genetic testing and drug discovery either by itself or with its corporate
partners. In addition, the Company believes its platform technology has the
potential to address a broad range of applications, including combinatorial
chemistry, industrial process control, forensics and environmental and food
pathogen testing. The Company also plans to develop fully integrated
"sample-to-answer" systems for
4
<PAGE> 8
both the clinical research and point-of-care settings using microelectronics to
process and analyze samples in a wide variety of applications.
The Company was incorporated in California in 1991 as Nanophore, Inc.
("Nanophore"), a wholly-owned subsidiary of Nanotronics, Inc. ("Nanotronics"),
and pursuant to a Plan of Corporate Separation and Reorganization, Nanophore
issued shares of its common stock to the Nanotronics shareholders and commenced
operations as Nanogen, Inc. in September 1993 (the "Spin-Off"). Nanogen
reincorporated in Delaware in November 1997. The terms "Nanogen" and the
"Company" refer to Nanogen, Inc., a Delaware corporation, and its predecessor.
The Company's executive offices are located at 10398 Pacific Center Court, San
Diego, California 92121 and its telephone number is (619) 546-7700.
5
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THE OFFERING
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Common Stock offered............................. shares
Common Stock to be outstanding after the shares(1)
offering.......................................
Use of proceeds.................................. To fund research and development,
expansion of manufacturing operations and
activities, expansion of sales and
marketing activities, working capital and
for general corporate purposes. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol........... NGEN
</TABLE>
SUMMARY FINANCIAL DATA
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<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 1, 1993) YEARS ENDED DECEMBER 31,
TO DECEMBER 31, --------------------------------------
1993 1994 1995 1996 1997
-------------------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract and grant revenue............ $ -- $ -- $ 318 $ 1,644 $ 2,123
Sponsored research.................... -- -- -- -- 1,243
----- ------- ------- ------- --------
Total revenues..................... -- -- 318 1,644 3,366
Operating expenses:
Research and development.............. 183 1,345 3,356 6,931 11,638
General and administrative............ 225 1,065 1,646 2,427 3,844
----- ------- ------- ------- --------
Total operating expenses........... 408 2,410 5,002 9,358 15,482
Interest income (expense), net.......... -- 34 96 (64) 975
----- ------- ------- ------- --------
Net loss................................ $ (408) $(2,376) $(4,588) $(7,778) $(11,141)
===== ======= ======= ======= ========
Pro forma net loss per share(2)......... $ (.80)
========
Number of shares used in computing
pro forma net loss per share(2)....... 14,010
========
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AS OF DECEMBER 31, 1997
---------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents.......................................... $ 19,498
Working capital.................................................... 16,957
Total assets....................................................... 23,215
Capital lease obligations, less current portion.................... 1,193
Accumulated deficit................................................ (26,291)
Total stockholders' equity......................................... 18,599
</TABLE>
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(1) Based on the number of shares outstanding at December 31, 1997. Includes an
aggregate of shares of Common Stock (based on the assumed initial
public offering price of $ per share) to be issued in the Private
Placement. Excludes 2,263,280 shares of Common Stock reserved for issuance
and available for grant or sale under the Company's Stock Option Plans,
under which there were options outstanding to purchase an aggregate of
625,091 shares of Common Stock as of December 31, 1997. Also excludes
631,072 shares of Common Stock subject to outstanding warrants and 69,000
shares of Preferred Stock subject to outstanding warrants, which will
convert into warrants to purchase 69,000 shares of Common Stock upon the
closing of this offering. See "Capitalization," "Management -- Stock Option
Plans," "Description of Capital Stock -- Warrants," and Note 4 of Notes to
Financial Statements.
(2) Computed on the basis described in Note 1 of Notes to Financial Statements.
(3) Adjusted to reflect (i) the sale by the Company of shares of Common
Stock offered hereby at an assumed public offering price of $ per
share, and (ii) the Private Placement and the application of the estimated
net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
6
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors in addition to the other information presented in this Prospectus,
before purchasing the shares of Common Stock offered hereby. This Prospectus
contains, in addition to historical information, forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from the results discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include those discussed
below, as well as those discussed elsewhere in this Prospectus.
EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY WHETHER PRODUCTS CAN BE
SUCCESSFULLY DEVELOPED
Nanogen is at an early stage of development. The Company has completed the
initial development of its platform and is developing products in the fields of
medical diagnostics, biomedical research, genomics, genetic testing and drug
discovery. There can be no assurances that the Company will be able to
successfully complete the development of products in any or all of these fields.
All of the Company's products are currently under development, and there can be
no assurance that such products will be successfully developed or commercialized
on a timely basis, if at all. Since the Company's commencement of operations in
1993, substantially all of the Company's resources have been dedicated to the
research and development of potential products based on its proprietary
semiconductor microchip technology, and no revenues have been generated from
product sales. The Company believes that its revenue growth and profitability
will depend substantially upon its ability to overcome significant technological
challenges and successfully introduce these new products into the marketplace.
In addition, the successful development of some of these new products will
depend on the development and incorporation of new technologies developed
through the Company's current and future collaborations. A number of
applications envisioned by the Company will require significant enhancements in
the basic technology platform including complete sample-to-answer capabilities.
If the Company is unable, for technological or other reasons, to complete the
development, introduction or scale-up of manufacturing of any new product, or if
such product does not achieve a significant level of market acceptance, the
Company's business, financial condition and results of operations would be
materially and adversely affected. See "Business -- Nanogen's Platform
Technology," "-- Applications and Products Under Development" and
"-- Manufacturing."
LACK OF MARKET ACCEPTANCE
The Company's strategy of using its proprietary semiconductor microchip
technology for the purposes of developing products in the fields of medical
diagnostics, biomedical research, genomics, genetic testing and drug discovery
is unproven and there can be no assurance that the Company will be able to
develop commercially viable products in any or all of these fields or that any
such products will be accepted in the marketplace. Additionally, there can be no
assurance that the Company will be successful in achieving adoption of its
system. Market acceptance will depend on many factors, including demonstrating
to customers that the Company's technology platform is a viable alternative to
currently available technologies. In addition, the Company's technology platform
could be adversely affected by limited funding available for capital
acquisitions by the Company's customers, as well as internal obstacles to
customer approvals of purchases of the Company's products. If the Company is
unable to achieve market acceptance, the Company's business, financial condition
and results of operations would be materially and adversely affected. See
"-- Dependence on Collaborative Alliances; Reliance on Collaborators."
DEPENDENCE ON COLLABORATIVE ALLIANCES; RELIANCE ON COLLABORATORS
The Company's strategy for development and commercialization of its
proprietary semiconductor microchip technology and related products includes and
depends on the formation of various strategic alliances and licensing
arrangements with collaborative partners. The Company's strategy is to enter
into collaborative arrangements with select companies to partially fund
development of, assist in obtaining regulatory approval and clearances for, and
commercialize its products. As a result, the Company's strategy for development
and commercialization of such products depends on the feasibility and continuity
of
7
<PAGE> 11
arrangements with existing and future collaborative partners and licensees.
There can be no assurance that the Company will be successful in entering into
or maintaining such collaborations to develop commercial applications of its
semiconductor microchip products. Failure to do so would have a material adverse
impact on the Company. The Company may have limited or no control over the time,
effort or financial resources that any partner may devote to the development or
marketing of the Company's products. There can be no assurance that any of the
Company's collaborative partners will perform their obligations as expected or
will devote sufficient resources to the development, clinical testing or
marketing of the Company's potential products. Any concomitant development by a
partner of competitive technologies, preclusion from entering into competitive
arrangements with other potential partners, disputes over ownership rights to
any intellectual property, know-how or technologies developed with a partner,
failure to obtain timely regulatory approvals or clearances, premature
termination of an agreement, or failure by a partner to devote sufficient
resources to the development and commercialization of the Company's products
could have a material adverse effect on the Company's business, financial
condition and results of operations of the Company.
Under the terms of the Company's joint venture arrangement with Becton
Dickinson, if the Company fails to achieve certain milestones by June 30, 1998,
the joint venture arrangement may be terminated, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company anticipates that the revenues derived from such
arrangement will be a significant source of funding for the Company's research
and development activities. In addition, certain milestones will need to be
agreed upon in the future. There can be no assurance that the parties will agree
to such milestones, and if agreed upon, there can be no assurances that such
milestones will be achieved. The Company will rely in part on Becton Dickinson
to manufacture certain components of its infectious disease products. Any
failure on the part of either the Company or Becton Dickinson to meet the
expected timelines could adversely affect the ability of the parties to achieve
timely submission of products for regulatory approval or to successfully
introduce the products in the commercial marketplace. Such delays in either the
regulatory process or the commercial introduction of such products would have a
material adverse effect on the Company's business, financial condition, and
results of operations. Additionally, the Company will rely on Becton Dickinson's
distribution capabilities to market the joint venture products. Any interruption
in this distribution channel or failure of Becton Dickinson to adequately fund
the marketing and sales commitments of the joint venture would have a material
adverse affect on the Company's business, financial condition and results of
operations. See "Business -- Collaborative Alliances--Becton, Dickinson and
Company."
The Company has recently signed agreements with Hoechst and Elan that
contemplate the commercialization of products resulting from research and
development collaboration agreements between the parties. There can be no
assurance that such agreements will result in commercially viable collaborations
between the parties, or that any resulting collaborations will be successful.
See "Business -- Collaborative Alliances -- Hoechst AG" and "-- Collaborative
Alliances -- Elan Corporation, plc."
HISTORY OF LOSSES AND ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE PROFITABILITY;
QUARTERLY FLUCTUATIONS
The Company has incurred net losses since its inception, and at December
31, 1997, had an accumulated deficit of approximately $26.3 million. For the
years ended December 31, 1995, 1996 and 1997, Nanogen had net losses of
approximately $4.6 million, $7.8 million and $11.1 million, respectively. The
Company anticipates that it will continue to incur additional operating losses
for at least the next several years. The estimates above and elsewhere in this
Prospectus of the minimum period during which the Company expects to incur
losses are forward-looking statements that involve risks and uncertainties.
There can be no assurance that the Company will not incur losses for periods of
time in excess of those set forth herein and elsewhere in this Prospectus and
actual results may differ materially. At this time, the Company has no products
available for sale and no revenues have been generated from commercialization of
products arising out of its technology. There can be no assurance that the
Company will ever attain profitability or will remain profitable on a quarterly
or annual basis in the future. The Company expects that its revenues will be
generated principally from the sale of its instrument system and the recurring
sale of its disposable cartridges. There can be no assurance that the Company
will sell a sufficient number of instruments and disposable cartridges at a
gross margin sufficient to achieve profitability. The Company intends to
significantly increase its investments in
8
<PAGE> 12
research and development, sales and marketing, manufacturing, clinical trials,
regulatory approvals and related infrastructure. As a result of the anticipated
increases in the Company's operating expenses, the Company's financial prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by early stage development companies, particularly companies in new
and rapidly evolving markets. The Company believes that future operating results
will be subject to quarterly fluctuations due to a variety of factors, including
the timing of payments from collaborators, whether and when new products are
successfully developed and introduced by the Company or its competitors, market
acceptance of future products, regulatory delays, product recalls, manufacturing
delays, shipment problems, product seasonality and changes in the mix of
products sold. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING
While the Company believes that its available cash, together with the
proceeds of this offering and the Private Placement, will be sufficient to
satisfy its funding needs for current operations for at least the next 24
months, the Company has incurred negative cash flow from operations since
inception and does not expect to generate positive cash flow to fund its
operations for at least the next several years. Thus, the Company may need to
raise additional capital to fund its research and development programs, to scale
up manufacturing activities and establish its sales and marketing capability.
The Company's current collaborations will, and future collaborations may,
require the Company to commit substantial amounts of capital. There can be no
assurance that the Company will be able to make such scheduled capital
contributions. The Company's future liquidity and capital funding requirements
will depend on numerous factors, including the extent to which the Company's
products under development are successfully developed and gain market
acceptance, the timing of regulatory actions regarding the Company's potential
products, the costs and timing of expansion of sales, marketing and
manufacturing activities, prosecution and enforcement of patents important to
the Company's business, the results of clinical trials, competitive
developments, and the Company's ability to enter into additional collaborative
arrangements. There can be no assurance that such additional capital will be
available on terms acceptable to the Company, if at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may include restrictive covenants. If adequate funds are not
available, the Company may be required to curtail its operations significantly
or to obtain funds through entering into collaborative agreements or other
arrangements on less favorable terms. The failure by the Company to raise
capital on acceptable terms when needed could have a material adverse effect on
the Company's business, financial condition or results of operations. See "Use
of Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
DEPENDENCE ON KEY PERSONNEL
The Company's future success is highly dependent on the efforts of its
senior management and scientific team, including its Chief Executive Officer,
President, Vice President -- Research and Product Development and Chief
Technical Officer. The loss of the services of any member of its senior
management or scientific staff may significantly delay or prevent the
achievement of product development and other business objectives. Because of the
specialized scientific nature of the Company's business, the Company is highly
dependent on its ability to attract and retain qualified scientific and
technical personnel. There is intense competition among major pharmaceutical and
chemical companies, semiconductor companies, specialized biotechnology firms and
universities and other research institutions for qualified personnel in the
areas of the Company's activities. Loss of the services of, or failure to
recruit, key scientific and technical personnel could adversely affect the
Company's business, financial condition or results of operations. In addition, a
substantial portion of the stock and stock options currently held by many of the
Company's key employees is vested and the remaining portion may become fully
vested over the next several years before the Company achieves significant
revenues or profitability. The Company may have to grant more stock or stock
options to give these employees additional incentives to remain with the
Company, resulting in dilution to stockholders. There can be no assurance that
granting additional stock or stock options will be sufficient to attract or
retain key employees. See "Business -- Employees" and "Management -- Directors,
Executive Officers and Key Scientific Personnel."
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INTENSE COMPETITION; COMPETING TECHNOLOGIES
As the Company develops applications for its technology, it expects to
encounter intense competition from a number of companies that offer products in
its targeted application areas. The Company anticipates that its competitors in
these areas will include health care companies that manufacture laboratory-based
tests and analyzers, diagnostic and pharmaceutical companies, as well as
companies developing drug discovery technologies. To the extent the Company is
successful in developing products in these areas, the Company will face
competition from established companies and numerous development-stage companies
that continually enter these markets.
In many instances, the Company's competitors have substantially greater
financial, technical, research and other resources and larger, more established
marketing, sales, distribution and service organizations than the Company.
Moreover, such competitors may offer broader product lines and have greater name
recognition than the Company, and may offer discounts as a competitive tactic.
In addition, several development stage companies are currently making or
developing products that compete with or will compete with those of the Company.
There can be no assurance that the Company's competitors will not succeed in
developing or marketing technologies or products that are more effective or
commercially attractive than the Company's current or future products, or that
would render the Company's technologies and products obsolete. Also, there can
be no assurance that the Company will have the financial resources, technical
expertise or marketing, distribution or support capabilities to compete
successfully in the future. The Company's future success will depend in large
part on its ability to maintain a competitive position with respect to the
technologies in which it competes. Rapid technological development by the
Company or others may result in competing products or technology. See
"Business -- Nanogen's Platform Technology," "-- Applications and Products Under
Development" and "-- Competition."
UNCERTAINTY OF PATENT AND PROPRIETARY TECHNOLOGY PROTECTION; POTENTIAL INABILITY
TO LICENSE TECHNOLOGY FROM THIRD PARTIES
The Company's commercial success will depend in part on obtaining and
maintaining meaningful patent protection on its inventions, technologies and
discoveries. The Company's strategy is to actively pursue patent protection in
the U.S. and foreign jurisdictions for technology it believes to be proprietary
and that offers competitive advantages for its products. The Company's ability
to compete effectively will therefore depend in part on its ability to develop
and maintain proprietary aspects of its technology, and to operate without
infringing the proprietary rights of others, or to obtain rights to such
third-party proprietary rights, if necessary. While Nanogen has four U.S. and
one foreign issued patents and is currently prosecuting additional patent
applications in the U.S. and with certain foreign patent offices, there can be
no assurance that any of the Company's pending patent applications will result
in the issuance of any patents, that the Company's patent applications will have
priority over others' applications, or that, if issued, any of the Company's
patents will offer protection against competitors with similar technologies.
There can be no assurance that any patents issued to the Company will not be
challenged, invalidated or circumvented in the future or that the rights created
thereunder will afford the Company a competitive advantage.
The commercial success of the Company also depends in part on the Company
neither infringing valid, enforceable patents or proprietary rights of third
parties, nor breaching any licenses that may relate to the Company's
technologies and products. The Company is aware of certain third-party patents
that may relate to the Company's technology. There can be no assurance that the
Company does not or will not infringe these patents or other patents or
proprietary rights of third parties. In addition, the Company has received and
may in the future receive notices claiming infringement from third parties as
well as invitations to take licenses under third-party patents. Any legal action
against the Company or its collaborative partners claiming damages and seeking
to enjoin commercial activities relating to the Company's products and processes
affected by third-party rights, in addition to subjecting the Company to
potential liability for damages, may require the Company or its collaborative
partners to obtain licenses in order to continue to manufacture or market the
affected products and processes. There can be no assurance that the Company or
its collaborative partners would prevail in any such action or that any license
(including licenses proposed by third parties) required under any such patent
would be made available on commercially acceptable terms, if at all. There are
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<PAGE> 14
a significant number of U.S. and foreign patents and patent applications held by
third parties in the Company's areas of interest, and the Company believes that
there may be significant litigation in the industry regarding patent and other
intellectual property rights. If the Company becomes involved in such
litigation, it could consume a substantial portion of the Company's managerial
and financial resources, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Additionally,
the defense and prosecution of interference proceedings before the U.S. Patent
and Trademark Office ("USPTO") and related administrative proceedings will
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. There can be no assurance
that the Company will not in the future become subject to USPTO interference
proceedings to determine the priority of inventions. In addition, laws of
certain foreign countries do not protect intellectual property to the same
extent as do laws in the U.S., which may subject the Company to additional
difficulties in protecting its intellectual property in those countries.
The Company also relies upon trade secrets, technical know-how and
continuing inventions to develop and maintain its competitive position. There
can be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, that the Company can
meaningfully protect its trade secrets, or that the Company will be capable of
protecting its rights to its trade secrets. The Company seeks to protect its
proprietary technology and patents, in part, by confidentiality agreements with
its employees and certain contractors. There can be no assurance that the
Company's own employees will not breach their existing Proprietary Information,
Inventions, and Dispute Resolution Agreements or that such agreements will
otherwise protect the Company's intellectual property, each of which could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Proprietary Technology and Patents."
NO ASSURANCE OF OBTAINING REGULATORY APPROVALS; GOVERNMENT REGULATORY PROCESS
The Company anticipates that the manufacturing, labeling, distribution and
marketing of a number of its diagnostic products will be subject to regulation
in the U.S. and in certain other countries. In the U.S., the Federal Drug
Administration ("FDA") regulates, as medical devices, most diagnostic tests and
in vitro reagents that are marketed as finished test kits and equipment.
Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations
promulgated thereunder, the FDA regulates the preclinical and clinical testing,
design, efficacy, safety, manufacture, labeling, distribution and promotion of
medical devices. The Company will not be able to commence marketing or
commercial sales in the U.S. of such products until it receives clearance or
approval from the FDA, which can be a lengthy, expensive and uncertain process.
There can be no assurance that the Company will not experience difficulties that
could delay or prevent the successful development, introduction and marketing of
these new products, that regulatory clearance or approval or clearance of any
new products will be granted by the FDA or foreign regulatory authorities on a
timely basis, if at all, or that the new products will be successfully
commercialized. Noncompliance with applicable FDA requirements can result in,
among other things, administrative sanctions or judicially imposed sanctions
such as injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing clearances
or approvals, and criminal prosecution. The FDA also has the authority to
request recall, repair, replacement or refund of the cost of any device
manufactured or distributed by the Company.
Any devices manufactured or distributed by the Company pursuant to FDA
clearance or approvals are subject to pervasive and continuing regulation by the
FDA and certain state agencies. Before a new device can be introduced in the
U.S. market, the manufacturer must generally obtain FDA clearance of a 510(k)
notification or FDA approval of a premarket approval ("PMA") application. A
510(k) clearance will generally only be granted if the information submitted to
the FDA establishes that the device is "substantially equivalent" to a legally
marketed Class I or Class II device or a preamendment Class III device (i.e. a
device that has been on the market since before May 28, 1976) for which the FDA
has not called for PMAs. The PMA approval process is more expensive, uncertain
and lengthy than the 510(k) clearance process. To obtain
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<PAGE> 15
a PMA, the Company, either alone or with the assistance of its strategic
partners, must submit extensive data, including preclinical and clinical trial
data, to demonstrate the safety and efficacy of a product. There can be no
assurance that with respect to any of the Company's products in development, the
FDA will not determine that the Company must adhere to the more costly, lengthy
and uncertain PMA approval process. Significant modifications of the labeling,
manufacturing and design of a cleared or approved device will require clearance
or approval by the FDA. There can be no assurance that the Company will be able
to obtain necessary regulatory approvals or clearances for its products on a
timely basis, if at all, and delays in receipt of or failure to receive such
approvals or clearances, the loss of previously received approvals or
clearances, limitations on intended uses imposed as a condition of such
approvals or clearances, or failure to comply with existing or future regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.
If marketed outside the U.S., the Company's products will be subject to
foreign regulatory requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursement, which vary from country to country
and are becoming more restrictive throughout the European Union. The process of
obtaining foreign regulatory approvals can be lengthy and require the
expenditure of substantial capital and resources, and there can be no assurance
that the Company or its collaboration partners will be successful in obtaining
the necessary approvals. Any delay or failure by the Company or its
collaboration partners to obtain regulatory approvals for its products would
adversely affect the Company's ability to generate product and royalty revenues,
which could have a material adverse effect on the Company's business, financial
condition and operating results.
The Company intends to conduct clinical investigations of its products
under development, which will entail distributing them in the U.S. on an
Investigational Use Only ("IUO") basis. Although clinical investigations of most
devices are subject to the investigational device exemption ("IDE")
requirements, clinical investigations of in vitro diagnostic ("IVD") tests, such
as a number of the Company's products, are exempt from IDE requirements
including the need to obtain the FDA's prior approval, provided the testing is
noninvasive, does not require an invasive sampling procedure that presents a
significant risk, does not intentionally introduce energy into a patient, and is
not used as a diagnostic procedure without confirmation by another medically
established test procedure. In addition, the IVD must be labeled for Research
Use Only ("RUO") or IUO, and distribution controls must be in place to limit the
use of the product to such use. There can be no assurance that the FDA would
agree that the Company's IUO distribution of its IVD products under development
will meet the requirements for IDE exemption. Furthermore, failure by the
Company or the recipients of its products under development to maintain
compliance with the IDE exemption requirements could result in enforcement
action by the FDA, including, among other things, the loss of the IDE exemption
or the imposition of other restrictions on the Company's distribution of its
products under development, which would adversely affect the Company's ability
to conduct the clinical investigations necessary to support marketing clearance
or approval.
Subsequent to the receipt of an FDA approval or clearance, the Company will
be required to adhere to the Quality System Regulation ("QSR") (formerly Good
Manufacturing Practices), which includes testing, control and documentation
requirements. Manufacturers must also comply with Medical Device Reporting
("MDR") requirements that a manufacturer report to the FDA any incident in which
its product may have caused or contributed to a death or serious injury, or in
which its product malfunctioned and would be likely to cause or contribute to a
death or serious injury upon recurrence. Labeling and promotional activities are
subject to scrutiny by the FDA and, in certain circumstances, by the Federal
Trade Commission. Current FDA enforcement policy prohibits the marketing of
approved medical devices for unapproved uses.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with QSR requirements, MDR requirements and other
applicable regulations. The recently finalized QSR requirements include design
controls that will likely increase the cost of compliance. There can be no
assurance that the Company will not incur significant costs to comply with laws
and regulations in the future or that such laws and regulations will not have a
material adverse effect upon the Company's business, financial condition and
results of operation.
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Any of the Company's customers using its diagnostic devices for clinical
use in the U.S. may be regulated under the Clinical Laboratory Improvement
Amendments of 1988 ("CLIA"). CLIA is intended to ensure the quality and
reliability of clinical laboratories in the U.S. by mandating specific standards
in the areas of personnel qualification, administration, participation in
proficiency testing, patient test management, quality control, quality assurance
and inspections. The regulations promulgated under CLIA establish three levels
of diagnostic tests ("waived," "moderately complex" and "highly complex") and
the standards applicable to a clinical laboratory depend on the level of the
tests it performs. CLIA requirements may prevent some clinical laboratories from
using certain of the Company's diagnostic products. Therefore, there can be no
assurance that the CLIA regulations and future administrative interpretations of
CLIA will not have a material adverse impact on the Company by limiting the
potential market for the Company's products. See "Business -- Government
Regulation."
DEPENDENCE ON SUPPLIERS
Certain key components and raw materials used in the manufacture of the
Company's products are currently provided from limited sources or in some cases
by single-source vendors. Although the Company believes that alternative sources
for such components and raw materials are available, any supply interruption in
a sole-sourced component of raw material would have a material adverse effect on
the Company's ability to manufacture its products until a new source of supply
is qualified and, as a result, could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
an uncorrected impurity or supplier's variation in a raw material, either
unknown to the Company or incompatible with the Company's manufacturing process,
could have a material adverse effect on the Company's ability to manufacture
products. The Company may be unable to find a sufficient alternative supply
channel in a reasonable time period, or on commercially reasonable terms, if at
all. Failure to obtain a supplier for the manufacture of components of its
future products, if any, could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Manufacturing."
LIMITED MANUFACTURING EXPERIENCE; POTENTIAL INABILITY TO SCALE UP MANUFACTURING
The Company has no experience manufacturing products for commercial
purposes. The Company presently relies on subcontractors to manufacture the
limited quantities of semiconductor microchips and other components it currently
requires for internal and collaborative purposes, as well as for use in clinical
trials and prototype products. The Company is currently qualifying new contract
manufacturers for large scale wafer fabrication, and there can be no assurance
that the Company will qualify and secure sufficient capacity on satisfactory
terms for commercial production. There can be no assurance that manufacturing,
supply and quality control problems will not arise as the Company either alone
or with subcontractors attempts to scale up manufacturing procedures or that
such scale-up can be achieved in a timely manner or at a commercially reasonable
cost. Any such failure to surmount such problems could lead to delays or pose a
threat to the ultimate commercialization of the Company's products and result in
a material adverse effect on the Company. If the Company or any of its contract
manufacturers encounter future manufacturing difficulties, including problems
involving the ability to scale up manufacturing capacity, production yields,
quality control and assurance, or shortages of components or qualified
personnel, it could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's manufacturing
facilities and those of its contract manufacturers are or will be subject to
periodic regulatory inspections by the FDA and other federal and state
regulatory agencies and such facilities are subject to QSR requirements of the
FDA. Furthermore, prior to approval of a PMA, the Company's and any third-party
manufacturer's facilities, procedures and practices will be subject to a
pre-approved inspection by the FDA. Failure by the Company or its third-party
manufacturer to maintain its facilities in accordance with QSR regulations,
other international quality standards or other regulatory requirements would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Manufacturing."
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LIMITED MARKETING AND SALES CAPABILITY
Nanogen intends to market and sell its products, if successfully developed,
directly and through strategic alliances and distribution arrangements with
third parties, including its collaborative partners. There can be no assurance
that any efforts to establish such strategic alliances or distribution
arrangements will be successful. The Company currently has limited product
marketing and sales capabilities, although it intends to recruit experienced
marketing and sales personnel as the Company grows closer to product
commercialization. In attracting, establishing and maintaining a marketing and
sales force, or entering into third-party marketing or distribution arrangements
with other companies, the Company expects to incur significant additional
expenses. No assurance can be given that the Company will be able to
successfully establish such a sales and marketing capability or enter into
third-party marketing or distribution arrangements or that it will be successful
in achieving marketplace acceptance for its products. See "Business -- Sales and
Marketing."
MANAGEMENT OF GROWTH
The Company has recently experienced, and expects to continue to experience
growth in the number of its employees and the scope of its operating and
financial systems. This growth has resulted in an increase in responsibilities
for both existing and new management personnel. The Company's ability to manage
growth effectively will require it to continue to implement and improve its
operational, financial and management information systems and to recruit, train,
motivate and manage its employees. There can be no assurance that the Company
will be able to manage its growth and expansion, and a failure to do so could
have a material adverse effect on the Company's business, financial condition
and results of operations.
PRODUCT LIABILITY EXPOSURE; INADEQUACY OR UNAVAILABILITY OF INSURANCE COVERAGE
The testing, manufacturing and marketing of the Company's products entails
an inherent risk of product liability claims. To date, the Company has not
experienced any product liability claims, but any such claims arising in the
future could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company intends to secure limited
product liability/clinical liability insurance coverage, but there can be no
assurance that the Company will be able to obtain such insurance on acceptable
terms with adequate coverage, or at reasonable costs. Potential product
liability claims may exceed the amount of the Company's insurance coverage or
may be excluded from coverage under the terms of the policy. There can be no
assurance that the Company's insurance once obtained can be renewed at a cost
and level of coverage comparable to that then in effect. Any claims against the
Company, regardless of their merit or eventual outcome, could have a material
adverse effect upon the Company's business, financial condition, and results of
operations.
ETHICAL AND PRIVACY CONSIDERATIONS
The Company's success in diagnostics and genetic testing applications will
depend in large part upon its ability to secure a market for certain of its
products under development. Genetic tests, including those performed using
Nanogen's technology platform, may be difficult to interpret and may lead to
misinformation or misdiagnosis. Even when a genetic test identifies the
existence of a mutation in an individual, the interpretation of the result is
often limited to the identification of a statistical probability that the tested
individual will develop the disease or condition for which the test is
performed. In addition, the inability to test for unknown genes which may cause
a particular genetic disorder may result in misdiagnosis. The prospect of
broadly available genetic testing has raised societal and governmental concerns
regarding the appropriate use and confidentiality of information provided by
such testing. Government authorities could, for social or other purposes, limit
the use of genetic testing or prohibit testing for genetic predisposition to
certain conditions, either of which could adversely affect the use of the
Company's products. In addition, there are additional issues regarding the
appropriate use of genetic testing information by entities such as insurance
companies and employers. It is possible that discrimination by insurance
companies could occur through the raising of premiums by insurers to prohibitive
levels, outright cancellation of insurance or unwillingness to provide coverage
to patients shown to have a genetic predisposition to a particular disease. In
addition, employers could discriminate against employees with a positive genetic
predisposition due to the increased risk for
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disease resulting in possible cost increases for health insurance and the
potential for lost employment time. Legislation has been proposed to govern the
confidentiality of genetic testing information, but there can be no assurance
that such legislation will be widely adopted, if at all, or if adopted that it
will adequately protect the privacy interests of genetic testing patients. There
can be no assurance that ethical concerns about genetic testing will not
materially adversely affect market acceptance of the Company's technology for
diagnostic applications, which could materially and adversely affect the
Company's business, financial condition and operating results. See
"Business -- Applications and Products Under Development -- Genetic Testing
Applications."
CONTINUED CONTROL BY DIRECTORS, EXECUTIVE OFFICERS, PRINCIPAL STOCKHOLDERS AND
AFFILIATED ENTITIES
The Company's directors, executive officers, principal stockholders and
entities affiliated with them will, in the aggregate, beneficially own
approximately % of the Company's outstanding Common Stock following the
completion of this offering and the Private Placement. These stockholders, if
acting together, would be able to control substantially all matters requiring
approval by the stockholders of the Company, including the election of directors
and the approval of mergers or other business combination transactions. See
"Principal Stockholders."
LACK OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after this offering. The initial public
offering price will be determined through negotiations between the Company and
the Underwriters and may bear no relationship to the price at which the Common
Stock will trade after the closing of this offering. In addition, the securities
markets have from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. The market prices of the common stock of many publicly held medical
device companies have in the past been, and can in the future be, especially
volatile. Announcements of technological innovations or new products by the
Company or its competitors, clinical investigation results, release of reports
by securities analysts, developments or disputes concerning patents or
proprietary rights, regulatory developments, changes in regulatory or medical
reimbursement policies, economic and other external factors, as well as
period-to-period fluctuations in the Company's financial results, may have a
significant impact on the market price of the Common Stock. In the past,
securities class action litigation has often been instituted following periods
of volatility in the market price for a company's securities. Such litigation
could result in substantial costs and a diversion of management attention and
resources, which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Underwriters."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock by existing stockholders under Rule 144 and
Rule 701 of the Securities Act of 1933, as amended (the "Securities Act"), or
through the exercise of outstanding registration rights or otherwise could have
an adverse effect on the price of the Company's Common Stock. The
shares of Common Stock being sold hereby, not including the Private Placement,
will be eligible for sale in the public market upon the effectiveness of this
offering. Excluding the shares of Common Stock being sold hereby and the Private
Placement, the remaining 16,614,598 shares of Common Stock (excluding shares
purchased pursuant to the exercise of unvested options and subject to repurchase
by the Company) may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act. As a result of lockups with the
Underwriters and the provisions of Rule 144 and 701, additional shares will be
available for sale in the public market as follows: (i) approximately 107,102
shares will be eligible for immediate sale on the date of this Prospectus, (ii)
16,453,697 shares of Common Stock will be eligible for sale 180 days after the
date of this Prospectus upon expiration of lockup agreements, and (iii) the
remainder of the shares of Common Stock will be eligible for sale from time to
time thereafter upon expiration of their respective holding periods. The holders
of the shares issued in the Private Placement will have the right to
register such shares for future sale and
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such shares will otherwise be eligible for sale one year from the closing date
of this offering, subject to the limitations of Rule 144. The Company intends to
register approximately 2,800,000 shares of Common Stock reserved for issuance
under its Stock Option Plans as soon as practicable following the date of this
Prospectus. Certain existing stockholders have rights under certain
circumstances to require the Company to register their shares for future sale.
See "Description of Capital Stock -- Registration Rights" and "Shares Eligible
for Future Sale."
POTENTIAL ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS AND
DELAWARE LAW
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of making it more difficult for a third party to acquire, or
of discouraging a third party from attempting to acquire control of the Company.
Such provisions could limit the price that certain investors might be willing to
pay in the future for shares of the Company's Common Stock. Certain of these
provisions allow the Company to issue Preferred Stock without any vote or
further action by the stockholders, provide for a classified board of directors,
eliminate the right of stockholders to call special meetings of stockholders or
to act by written consent without a meeting. These provisions may make it more
difficult for stockholders to take certain corporate actions and could have the
effect of delaying or preventing a change in control of the Company. See
"Management" and "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price will be substantially higher than the net
tangible book value per share of Common Stock. Purchasers of shares of Common
Stock in this offering and the Private Placement will incur immediate and
substantial dilution of $ per share. Such purchasers will experience
additional dilution upon the exercise of outstanding stock options and warrants.
Future capital funding transactions may also result in dilution to purchasers in
this offering. See "Dilution."
ABSENCE OF DIVIDENDS
The Company has never paid cash dividends on its capital stock and does not
anticipate paying any cash dividends in the foreseeable future. See "Dividend
Policy."
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USE OF PROCEEDS
The proceeds to the Company from the sale of the shares of Common
Stock being offered by the Company are estimated to be approximately $
(approximately $ if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $ per
share and after deducting estimated underwriting discounts and commissions and
estimated offering expenses. Additionally, pursuant to the Private Placement,
and assuming an initial public offering price of $ per share, the
Company plans to sell directly to Becton Dickinson, Hoechst and Elan an
aggregate of shares of its Common Stock for an aggregate purchase
price of $21.0 million.
Of the aggregate estimated net proceeds of $ , the Company
currently expects to use approximately $ million for research and
product development, including internal development, acquisitions, licenses or
as part of commitments for third-party collaborative arrangements; approximately
$ million for operational and capital expenditures, including facilities
expansion, manufacturing scale-up and manufacturing and laboratory equipment;
and approximately $ million for establishing regulatory and sales and
marketing capabilities. The Company will use the balance of approximately $
million of the net proceeds for working capital and other general corporate
purposes. The cost, timing and amount of funds required by the Company cannot be
precisely determined at this time and will be based upon numerous factors,
including the following: the Company's progress in research and development; the
results of clinical trials; the timing and costs of obtaining regulatory
approvals; the ability of the Company to establish and receive payments under
collaborative agreements; the costs involved in preparing, filing, prosecuting,
maintaining, defending and enforcing patent claims; competing technological and
market developments; changes in the Company's existing research relationships;
evaluation of the commercial viability of potential products; effective
commercialization activities and arrangements; and the cost and availability of
alternative methods of financing. The Board of Directors has broad discretion in
determining how the proceeds of this offering will be applied. Pending such
uses, the Company intends to invest the net proceeds in short-term,
interest-bearing obligations.
DIVIDEND POLICY
The Company has never declared or paid dividends on its capital stock and
does not anticipate paying any dividends in the foreseeable future. The Company
currently intends to retain its earnings, if any, for the development and
expansion of its business.
17
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 (i) on a pro forma basis to give effect to the conversion of
all outstanding shares of the Company's Preferred Stock into Common Stock and
the authorization of 5,000,000 shares of Preferred Stock and 50,000,000 shares
of Common Stock upon the closing of this offering, and (ii) as adjusted to give
effect to the Private Placement and the sale of the shares of Common
Stock being offered hereby at an assumed initial public offering price of
$ per share and after deducting the estimated underwriting discounts
and commissions and estimated offering expenses payable by the Company.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------
PRO FORMA AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligations, less current portion........................ $ 1,193 $ 1,193
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no
shares issued and outstanding, pro forma and as adjusted.......... -- --
Common stock, $0.001 par value; 50,000,000 shares authorized, pro
forma and as adjusted; 18,459,184 shares issued and outstanding,
pro forma; shares issued and outstanding, as
adjusted(1)....................................................... 18
Additional paid-in capital........................................... 47,574
Notes receivable from stockholders................................... (1,129) (1,129)
Deferred compensation................................................ (1,573) (1,573)
Accumulated deficit.................................................. (26,291) (26,291)
-------- --------
Total stockholders' equity........................................ 18,599
-------- --------
Total capitalization......................................... $ 19,792 $
======== ========
</TABLE>
- ---------------
(1) Based on the number of shares of Common Stock outstanding at December 31,
1997. Includes 2,315,893 shares of Common Stock purchased through early
exercise of incentive stock options which remain subject to repurchase by
the Company. Excludes (i) 2,263,280 shares of Common Stock reserved for
issuance and available for grant or sale under the Company's Stock Option
Plans, under which there were options outstanding to purchase an aggregate
of 625,091 shares of Common Stock as of December 31, 1997, (ii) warrants to
purchase 631,072 shares of Common Stock, and (iii) warrants to purchase
69,000 shares of Preferred Stock, which will convert into warrants for the
purchase of 69,000 shares of Common Stock upon the closing of this offering.
18
<PAGE> 22
DILUTION
The pro forma net tangible book value of the Company as of December 31,
1997 was approximately $18,599,000, or $1.01 per share. Pro forma net tangible
book value per share represents the amount of total tangible assets less total
liabilities of the Company, divided by the number of shares of Common Stock
outstanding. After giving effect to the Private Placement, the pro forma net
tangible book value per share at December 31, 1997 would have been or
approximately $ per share. After giving effect to the sale of the
shares of Common Stock offered by the Company hereby (at an assumed
initial public offering price of $ per share and after deduction of
estimated underwriting discounts and commissions and estimated offering
expenses), the pro forma net tangible book value of the Company at December 31,
1997 would have been $ , or $ per share. This represents an
immediate increase in such net tangible book value of $ per share to
existing stockholders and an immediate dilution of $ per share to new
investors purchasing shares in this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price................................ $
-----
Pro forma net tangible book value before offering.................. $1.01
Increase attributable to the Private Placement.....................
Pro forma net tangible book value per share after the Private
Placement.......................................................
Pro forma increase attributable to new investors...................
-----
Pro forma net tangible book value after offering.....................
-----
Dilution to new investors............................................ $
=====
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1997 (after giving effect to the Private Placement and the conversion of all
outstanding shares of Preferred Stock into Common Stock upon completion of this
offering), the differences between existing stockholders (including, without
limitation, Becton Dickinson, Hoechst and Elan) and new investors with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company, and the average consideration paid per share
(based upon an assumed initial public offering price of $ per share and
before deduction of estimated underwriting discounts and commissions and
offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 18,459,184 % $46,847,464 % $ 2.54
New investors......................
---------- ----- ---------- -----
Total.................... 100.0% $ 100.0%
========== ===== ========== =====
</TABLE>
The foregoing table assumes no exercise of the Underwriters' over-allotment
option or of any outstanding stock options or warrants. As of December 31, 1997,
there were (i) options to purchase an aggregate of 625,091 shares of Common
Stock at exercise prices ranging from $.01 to $.60 per share, (ii) warrants to
purchase 631,072 shares of Common Stock, and (iii) warrants to purchase 69,000
shares of Preferred Stock, which will convert into warrants for the purchase of
69,000 shares of Common Stock upon the closing of this offering. To the extent
these options and warrants are exercised, there will be further dilution to new
investors. See "Management -- Stock Option Plans" and Note 4 of the Notes to
Financial Statements.
19
<PAGE> 23
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
statements of operations for each of the three years in the period ended
December 31, 1997, and the Company's balance sheet data at December 31, 1996 and
1997, are derived from the financial statements of the Company that have been
audited by Ernst & Young LLP, which are included elsewhere herein and are
qualified by reference to such financial statements. The balance sheet data at
December 31, 1993, 1994 and 1995, and the statement of operations data for the
period from inception (September 1, 1993) to December 31, 1993 and for the year
ended December 31, 1994, have been derived from financial statements audited by
Ernst & Young LLP which are not included herein. The selected financial data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
financial statements and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 1, 1993)
TO YEARS ENDED DECEMBER 31,
DECEMBER 31, --------------------------------------
1993 1994 1995 1996 1997
--------------------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract and grant revenue............ $ -- $ -- $ 318 $ 1,644 $ 2,123
Sponsored research.................... -- -- -- -- 1,243
----- ------- ------- ------- -------
Total revenues..................... -- -- 318 1,644 3,366
Operating expenses:
Research and development.............. 183 1,345 3,356 6,931 11,638
General and administrative............ 225 1,065 1,646 2,427 3,844
----- ------- ------- ------- -------
Total operating expenses........... 408 2,410 5,002 9,358 15,482
Interest income (expense), net.......... -- 34 96 (64) 975
----- ------- ------- ------- -------
Net loss................................ $ (408) $(2,376) $(4,588) $(7,778) $(11,141)
===== ======= ======= ======= =======
Pro forma net loss per share(1)......... $ (.80)
=======
Number of shares used in computing
pro forma net loss per share (1)...... 14,010
=======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 118 $ 206 $ 4,318 $16,775 $ 19,498
Working capital (deficit)....................... (264) (22) 3,931 14,853 16,957
Total assets.................................... 118 1,622 6,339 19,090 23,215
Capital lease obligations, less current
portion....................................... -- 347 631 935 1,193
Accumulated deficit............................. (408) (2,784) (7,372) (15,151) (26,291)
Total stockholders' equity (net capital
deficiency)................................... (264) 865 4,950 15,680 18,599
</TABLE>
- ---------------
(1) Computed on the basis described in Note 1 of Notes to Financial Statements.
20
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below, as well as those discussed under
"Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
Nanogen integrates advanced microelectronics and molecular biology into a
platform technology with broad commercial applications in the fields of medical
diagnostics, biomedical research, genomics, genetic testing and drug discovery.
Nanogen's fully automated system, which incorporates a proprietary semiconductor
microchip, provides a flexible tool for the rapid identification and analysis of
any test sample containing charged molecules. Through the use of
microelectronics, the Company's technology enables the active movement and
concentration of charged molecules to and from designated microlocations, or
test sites, on the semiconductor microchip. This electronic concentration of
molecules greatly accelerates molecular binding at each microlocation. In
addition, Nanogen's technology allows the simultaneous analysis of multiple test
results, or multiplexing, from a single sample. The open architecture design of
the Nanogen system enables the Company to offer microchips with arrays designed
and built by Nanogen for specific applications or with arrays that can be
customized by the end user. The Company believes its technology will accelerate
the development of products that capitalize on the increasing availability of
genetic information and its relationship to human disease. The Company further
believes its semiconductor based platform technology provides a low cost, highly
efficient, accurate and versatile integrated system that will shift the paradigm
from current manual and mechanical methods to microelectronic systems, thereby
significantly improving the quality of healthcare.
Since commencing operations in 1993, Nanogen has applied substantially all
of its resources to its research and development programs. The Company has
incurred losses since inception and, as of December 31, 1997, had an accumulated
deficit of approximately $26.3 million. The Company expects to incur significant
losses over at least the next several years as it expands its research and
product development efforts including clinical studies and regulatory approvals,
and expands its sales and marketing, manufacturing and related infrastructure.
The Company does not anticipate revenues from product sales for the next
several years and anticipates its main sources of revenues during such period
will be payments from contracts, grants and sponsored research. At this time,
the Company has no products available for sale and no revenues have been
generated from the sale of products arising out of its technology. There can be
no assurance that the Company will ever attain profitability or will remain
profitable on a quarterly or annual basis in the future. The Company believes
that future operating results will be subject to quarterly fluctuations due to a
variety of factors, including the achievement of certain milestones under its
collaborative agreements, whether and when new products are successfully
developed and introduced by the Company or its competitors, market acceptance of
products under development or new products, regulatory and manufacturing delays.
Payments under sponsored research contracts will be subject to significant
fluctuations in both timing and amount and therefore the Company's results of
operations for any period may not be comparable to the results of operations for
any other period. See "Risk Factors -- Early Stage of Development; Technological
Uncertainty Whether Products Can Be Successfully Developed," "-- Lack of Market
Acceptance," "-- History of Losses and Accumulated Deficit; Uncertainty of
Future Profitability; Quarterly Fluctuations," "Business -- Collaborative
Alliances -- Becton, Dickinson and Company," "-- Collaborative
Alliances -- Hoechst AG" and "-- Collaborative Alliances -- Elan Corporation,
plc."
21
<PAGE> 25
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
Revenues. For the year ended December 31, 1997, revenue from contracts,
grants and sponsored research totaled approximately $3.4 million compared to
approximately $1.6 million and approximately $300,000 for the years ended
December 31, 1996 and 1995, respectively. This increase was due to an increase
in the number of active contracts to six during the year ended December 31, 1997
from three and one during the years ended December 31, 1996 and 1995,
respectively. In 1997, the Company received funding from The National Institute
of Standards and Technology -- Advanced Technology Program (ATP II) under a $2.0
million two-year award initiated in May 1997, a one-year grant of $900,000 from
the Bode Technology Group ("Bode") initiated in May 1997, funding from The
National Institute of Justice under a $700,000 one-year award initiated in March
1997, and funding from The Potomac Institute for Policy Studies under an
approximately $128,000 grant initiated in August 1997. Additionally, the Company
entered into a sponsored research agreement with Becton Dickinson pursuant to
which the Company began generating revenue in May 1997. In October 1997, such
research agreement was superseded by a series of agreements between the Company
and Becton Dickinson in connection with the establishment of a joint venture
collaboration. See "Business -- Collaborative Alliances -- Becton, Dickinson and
Company." In 1996, the Company received funding from The National Institute of
Standards and Technology -- Advanced Technology Program ("ATP I") under a $2.0
million two-year award initiated in August 1995, as well as funding from the
California Trade and Commerce Agency Defense Conversion Program under a one-year
grant in the amount of approximately $250,000 initiated in June 1996, and a
one-year renewable grant of approximately $500,000 from Bode initiated in March
1996. In 1995, revenue was only recognized under the ATP I award. The Company
had no sponsored research revenue in 1996 or 1995.
Research and Development Expenses. Research and development expenses
increased to approximately $11.6 million during the year ended December 31, 1997
from approximately $6.9 million and $3.4 million in the years ended December 31,
1996 and 1995, respectively. Research and development expenses include salaries,
lab supplies, consulting, travel, facilities and other expenditures relating to
research and product development. The increases from year to year are
attributable to the continued growth of research activities, including hiring of
additional scientific personnel, increased purchases of laboratory supplies and
services to support the increased number of contracts and grants and the
sponsored research program with Becton Dickinson, and expansion of research and
development facilities. The Company expects research and development spending to
increase significantly over the next several years as the Company expands
research and product development efforts, including initiation of clinical
studies required to obtain regulatory approvals.
General and Administrative Expenses. General and administrative expenses
were approximately $3.8 million in 1997 compared to approximately $2.4 million
in 1996 and approximately $1.6 million in 1995, primarily due to the hiring of
additional personnel, administrative support and increased legal costs primarily
relating to the Company's intellectual property. General and administrative
expenses are expected to continue to increase over the next several years in
support of the Company's expanding operations, research and development efforts,
commercialization of products as well as the costs associated with operating as
a public company.
Interest Income (Expense), Net. The Company had net interest income of
approximately $975,000 in 1997 compared to net interest expense of approximately
$64,000 in 1996 and net interest income of $96,000 in 1995. The significant
increase in 1997 was primarily attributable to increased cash balances as a
result of private placements of the Company's equity securities between December
1996 and May 1997 totaling approximately $32.2 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
the net proceeds received from private placements of preferred equity securities
and with certain short term borrowings that were subsequently converted into
equity securities. As of December 31, 1997, the Company had received net
proceeds aggregating approximately $44.1 million from these transactions. In
addition, the Company has
22
<PAGE> 26
received proceeds from equipment financing totaling approximately $3.4 million
through December 31, 1997. The Company anticipates that it will continue to use
capital equipment leasing facilities to fund certain of its equipment
acquisitions and leasehold improvements.
Net cash used in operating activities was approximately $9.6 million, $6.1
million and $4.2 million for 1997, 1996 and 1995, respectively. Cash used for
operations was primarily related to the funding of expanding research and
development activities along with the establishment of an administrative
infrastructure. The Company will require additional capital to expand research
and product development efforts including clinical trials and regulatory
approvals, expand sales and marketing, manufacturing and related infrastructure,
to expand its leased research and administrative facility and to construct a
manufacturing facility.
At December 31, 1997, the Company's principal source of liquidity was
approximately $19.5 million in cash and cash equivalents. While the Company
believes that these sources of liquidity, together with the proceeds of this
offering and the Private Placement, will be sufficient to satisfy its funding
needs for current operations for at least the next 24 months, the Company has
incurred negative cash flow from operations since inception and does not expect
to generate positive cash flow to fund its operations for at least the next
several years. This estimate of the period for which the Company expects its
available sources of liquidity to be sufficient to meet its capital requirements
is a forward-looking statement that involves risks and uncertainties. There can
be no assurance that the Company will be able to meet its capital requirements
for this period as a result of certain factors set forth under "Risk
Factors -- Future Capital Requirements; Uncertainty of Additional Funding" and
elsewhere in this Prospectus. In the event the Company's capital requirements
are greater than estimated, the Company may need to raise additional capital to
fund its research and development programs, to scale up manufacturing activities
and expand its sales and marketing efforts to support the commercialization of
its products under development. The Company's future liquidity and capital
funding requirements will depend on numerous factors, including the extent to
which the Company's products under development are successfully developed and
gain market acceptance, the timing of regulatory actions regarding the Company's
potential products, the costs and timing of expansion of sales, marketing and
manufacturing activities, procurement and enforcement of patents important to
the Company's business, and results of clinical trials, regulatory approvals and
competition. There can be no assurance that such additional capital will be
available on terms acceptable to the Company, if at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may include restrictive covenants. If adequate funds are not
available, the Company may be required to curtail its operations significantly
or to obtain funds through entering into collaborative agreements or other
arrangements on unfavorable terms. The failure by the Company to raise capital
on acceptable terms when needed could have a material adverse effect on the
Company's business, financial condition or results of operations.
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1997, the Company had federal and California net
operating loss ("NOL") carryforwards of approximately $25.0 million and $6.1
million, respectively, and approximately $820,000 and $502,000 of research and
development ("R&D") tax credits available to offset future federal and state
income taxes, respectively. The federal and California NOL carryforwards, which
are subject to alternative minimum tax limitations and to examination by the tax
authorities, will begin expiring in 2006 and 1998, respectively, unless
previously utilized. The federal and California R&D tax credit carryforwards
will begin expiring in 2007 unless previously utilized. The Company believes
that this offering combined with the Private Placement may constitute a "change
of ownership" under federal income tax regulations. As such, the Company may be
limited in the amount of NOLs incurred prior to this offering which may be
utilized to offset future taxable income. Similar limitations may also apply to
utilization of R&D tax credits to offset taxes payable. However, the Company
does not believe such limitations will have a material impact on its ability to
utilize such NOLs. See Note 5 of Notes to Financial Statements.
YEAR 2000 ISSUES
The Company is currently developing a plan to insure that its systems and
software infrastructure are Year 2000 compliant. Key financial, information and
operational systems will be assessed and plans will be
23
<PAGE> 27
developed to address required systems modifications. Given the relatively small
size of the Company's systems and the predominantly new hardware, software and
operating systems, management does not anticipate any significant delays in
becoming Year 2000 compliant. However, the Company is unable to control whether
its current and future partners' systems are Year 2000 compliant. To the extent
that partners would be unable to order products or pay invoices or suppliers
would be unable to manufacture and ship product, the Company's operations could
be affected. However, management does not believe that Year 2000 changes will
have a material impact on the Company's business, financial condition or results
of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. This standard is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 requires that all components of
comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments, and
unrealized gains and losses on investments, shall be reported, net of their
related tax effect, to arrive at comprehensive income. The Company does not
believe that comprehensive income will be materially different than net income
or loss.
24
<PAGE> 28
BUSINESS
OVERVIEW
Nanogen integrates advanced microelectronics and molecular biology into a
platform technology with broad commercial applications in the fields of medical
diagnostics, biomedical research, genomics, genetic testing and drug discovery.
Nanogen's fully automated system, which incorporates a proprietary semiconductor
microchip, provides a flexible tool for the rapid identification and analysis of
any test sample containing charged molecules. Through the use of
microelectronics, the Company's technology enables the active movement and
concentration of charged molecules to and from designated microlocations, or
test sites, on the semiconductor microchip. This electronic concentration of
molecules greatly accelerates molecular binding at each microlocation. In
addition, Nanogen's technology allows the simultaneous analysis of multiple test
results, or multiplexing, from a single sample. The open architecture design of
the Nanogen system enables the Company to offer microchips with arrays designed
and built by Nanogen for specific applications or with arrays that can be
customized by the end user. The Company believes its technology will accelerate
the development of products that capitalize on the increasing availability of
genetic information and its relationship to human disease. The Company further
believes its semiconductor based platform technology provides a low cost, highly
efficient, accurate and versatile integrated system that will shift the paradigm
from current manual and mechanical methods to microelectronic systems, thereby
significantly improving the quality of healthcare.
The Company has established corporate alliances in certain areas of
infectious disease diagnostics, drug discovery and genomics as part of its
strategy to expand the applications and accelerate the commercialization of
products derived from its technology. The Company is developing products to
expedite the diagnosis of infectious disease through its joint venture with
Becton Dickinson. The Company has also entered into agreements for the
establishment of a collaboration and joint venture with Hoechst to develop drug
discovery tools, and a collaboration with Elan for genomic applications. In
addition to their commitments to provide research funding, these corporate
partners have agreed to purchase an aggregate of $21.0 million of Common Stock
directly from the Company in the Private Placement to occur concurrent with this
offering. The Company's collaborations permit integration of the Company's
technology with the resources and technology of its partners, while allowing the
Company to independently pursue diagnostics, drug discovery and genomics
opportunities outside the scope of these collaborations.
The Company's commercialization strategy is to establish its platform
technology as the standard for molecular identification and analysis. Nanogen
will provide its products initially to leading research institutions and opinion
leaders to enable them to exploit the open architecture design in developing
additional novel applications. Concurrently, the Company is developing
commercial products in medical diagnostics, biomedical research, genomics,
genetic testing and drug discovery either by itself or with its corporate
partners. In addition, the Company believes its platform technology has the
potential to address a broad range of applications, including combinatorial
chemistry, industrial process control, forensics and environmental and food
pathogen testing. The Company also plans to develop fully integrated
sample-to-answer systems for both the clinical research and point-of-care
settings using microelectronics to process and analyze samples in a wide variety
of applications.
NANOGEN'S PLATFORM TECHNOLOGY
Nanogen's proprietary platform technology takes advantage of the fact that
most biological molecules are either positively or negatively charged and is
ideally suited to unravelling complex genetic information. Through the use of
microelectronics, Nanogen's technology enables the active movement and
concentration of electronically charged molecules to and from designated test
sites on its semiconductor microchip. These test sites are arranged in an array
on the Company's microchip. In addition, Nanogen's technology allows for the
simultaneous analysis of multiple test results, or "multiplexing," from a single
sample.
25
<PAGE> 29
Nanogen's proprietary technology has broad applications for the analysis of
any unknown charged biological molecule which is capable of binding specifically
to a known capture molecule on a microchip. The Company has initially focused on
DNA-based sample analysis in developing applications utilizing its platform.
The Company's technology allows small sequences of DNA capture probes to be
electronically placed at, or "addressed" to, specific sites on the microchip. A
test sample can then be analyzed for the presence of target DNA molecules by
determining which of the DNA capture probes on the array bind, or hybridize,
with complementary DNA in the test sample. In contrast to nonelectronic or
passive hybridization with conventional arrays on paper or glass "chips," the
use of electronically mediated active hybridization to move and concentrate
target DNA molecules accelerates hybridization so that hybridization occurs in
minutes rather than the hours required for passive hybridization techniques. In
addition to DNA applications, the Company believes its technology can be applied
to a number of other analyses, including antigen-antibody, enzyme-substrate,
cell-receptor and cell separation techniques.
The Nanogen system can integrate in a single platform the following
electronic operational features which are illustrated on the inside front cover:
Electronic Addressing. Electronic addressing is the placement of charged
molecules at specific test sites. Since DNA has a strong negative charge, it can
be electronically moved to an area of positive charge. A test site or a row of
test sites on the microchip is electronically activated with a positive charge.
A solution of DNA probes is introduced onto the microchip. The negatively
charged probes rapidly move to the positively charged sites, where they
concentrate and are chemically bound to that site. The microchip is then washed
and another solution of distinct DNA probes can be added. Site by site, row by
row, an array of specifically bound DNA probes can be assembled or addressed on
the microchip. In the electronic addressing illustration on the inside front
cover, a total of five sets of different capture probes have been electronically
addressed to the microchip. With the ability to electronically address capture
probes to specific sites, the Nanogen system allows end users to build custom
arrays through the placement of specific capture probes on a microchip. In
contrast to current technologies, these microchip arrays can be built in a
matter of minutes at a minimal cost, providing research professionals with a
powerful and versatile tool to process and analyze molecular information.
Electronic Concentration and Hybridization. Following electronic
addressing, Nanogen uses electronics to move and concentrate target molecules to
one or more test sites on the microchip. The electronic concentration of sample
DNA at each test site promotes rapid hybridization of sample DNA with
complementary capture probes. In contrast to the passive hybridization process,
the electronic concentration process has the distinct advantage of significantly
accelerating the rate of hybridization. To remove any unbound or nonspecifically
bound DNA from each site, the polarity or charge of the site is reversed to
negative, thereby forcing any unbound or nonspecifically bound DNA back into
solution away from the capture probes. In addition, since the test molecules are
electronically concentrated over the test site, a lower concentration of target
DNA molecules is required, thus reducing the time and labor otherwise required
for pre-test sample preparation.
Electronic Stringency Control. Electronic stringency control is the
reversal of electrical potential to quickly and easily remove unbound and
nonspecifically bound DNA as part of the hybridization process. Electronic
stringency provides quality control for the hybridization process and ensures
that any bound pairs of DNA are truly complementary. The precision, control, and
accuracy of Nanogen's platform technology, through the use of the controlled
delivery of current in the electronic stringency process, permits the detection
of single point mutations, single base pair mismatches, or other genetic
mutations, which have significant implications in a number of diagnostic and
research areas. Electronic stringency is achieved without the cumbersome
processing and handling otherwise required to achieve the same results through
conventional methods. In contrast to passive arrays, Nanogen's technology can
accommodate both short and long single-stranded fragments of DNA. The use of
longer probes increases the certainty that the DNA which hybridizes with the
capture probe is the correct target. Nanogen's electronic stringency control
reduces the required number of probes and therefore test sites on the microchip,
relative to conventional DNA arrays. In contrast, traditional passive
hybridization processes are difficult to control and require more replicants of
every possible base pair match so that correct matches can be positively
identified.
26
<PAGE> 30
Electronic Multiplexing. Nanogen's electronic multiplexing feature allows
the simultaneous analysis of multiple tests from a single sample. Electronic
multiplexing is facilitated by the ability to independently control individual
test sites (for addressing of capture probes and concentration of test sample
molecules) which allows for the simultaneous use of biochemically unrelated
molecules on the same microchip. Sites on a conventional DNA array cannot be
individually controlled, and therefore the same process steps must be performed
on the entire array. The use of electronics in the Company's technology provides
increased versatility and flexibility over such conventional methods.
Strand Displacement Amplification. Strand Displacement Amplification
("SDA") is a proprietary target amplification process whereby very low numbers
of diagnostic targets in a test sample are enzymatically amplified to much
higher levels, greatly simplifying accurate detection of these targets. In
connection with forming its relationship with Becton Dickinson, the joint
venture was granted certain non-exclusive rights to Becton Dickinson's patents
relating to SDA in infectious disease diagnostics. In addition, the Company was
also granted certain nonexclusive rights to use SDA in the fields of in vitro
human genetic testing and cancer diagnostics. The Company believes that SDA will
be an important element in the development of sample-to-answer applications.
NANOGEN SYSTEM COMPONENTS
The Nanogen system, illustrated on the inside front cover, consists of both
a disposable cartridge containing a proprietary semiconductor microchip and a
fully automated instrument that controls all aspects of microchip operations,
processing, detection and reporting. The system has been designed so that the
operator simply inserts a disposable cartridge containing a test sample into the
instrument. All subsequent steps are handled automatically within minutes.
DISPOSABLE CARTRIDGE
The disposable cartridge consists of a proprietary semiconductor microchip
with electrical and fluidic connections to the instrument. Several prototypes of
the disposable cartridges have been completed, and the Company is finalizing
designs for manufacturing. The Company expects that the disposable cartridge and
microchip can be manufactured in high volumes at a low cost.
Semiconductor Microchip. Nanogen's proprietary microchip capitalizes on
advances in the semiconductor industry and is designed and constructed using
state-of-the-art microlithography and fabrication techniques. Nanogen's
microchip is coated with a permeation layer to which capture probes are attached
and is mounted on the disposable cartridge. The original microchip design
measures one square centimeter with an active area of one square millimeter
containing a five-by-five array of 25 electrodes, or independent test sites, per
microchip. Nanogen is currently testing additional microchip designs containing
100 electrodes fabricated with wire bonding techniques. In addition, the Company
has developed microchips containing 400 electrodes based on CMOS process
integrated circuit designs and is developing high density arrays of 10,000 or
more sites. Recent microchip configurations are less than half of the original
size, but contain all of the functionality of the original microchip. These new
configurations significantly reduce manufacturing costs and further size
reductions are contemplated as development continues. The microchip can be
designed and built by Nanogen for specific applications or can be individually
customized by the end user.
Permeation Layer. The Company's proprietary permeation layer, which is
critical to the proper functioning of the Nanogen system, is the interface
between the surface of the microchip and the biological test environment. The
permeation layer isolates the biological materials from the harsh
electrochemical environment near the electrode surface and provides the
chemistry necessary for attachment of capture probes.
Capture Probes. Capture probes or other capture molecules are
electronically addressed to the desired microlocations and chemically attached
to the permeation layer. Because independent control can be applied at any test
site on Nanogen's microchip, different capture probes can be addressed on the
same microchip, allowing multiple tests to be processed simultaneously.
Nanogen's cartridges can be sold with preloaded sets of
27
<PAGE> 31
capture probes or can be customized by the end user in build-your-own-chip
applications which will allow the customer to assemble specific probes onto a
microchip to perform individualized analyses.
NANOGEN INSTRUMENT
Nanogen's fully integrated instrument consists of three major subsystems:
(i) a highly sensitive, laser-based fluorescence scanner that detects molecular
binding, (ii) a fluid handling subsystem that controls test sample application
and washing steps, and (iii) computer hardware and software that allow the
operator to select assays from a simple, graphical user menu which controls all
microchip operations, tabulates test results, and prints test reports.
Fluorescent Array Scanner. The fluorescent scanner uses pattern recognition
software and optoelectronic technology to reduce instrument cost and size and
eliminate the need for complicated array positioning mechanics. In its present
configuration, the scanner is able to perform high sensitivity scans of 100 test
site arrays in less than two minutes. With this scanner, fluorescence is
detectable at levels of fewer than 500 molecules at each test site.
Fluidics Station. The instrument fully automates the movement of the
reagents and test sample onto the disposable cartridge. The fluidic subassembly
of the instrument includes a panel of precision syringe pumps, a
cartridge-mounted sample assembly and appropriate fluidic connections between
the instrument and the disposable cartridge.
Computer Hardware and Software System. An advanced multi-tasking operating
system and Pentium-based microprocessor control all aspects of machine
operation, including bar-coded assay selection, assay operation, fluorescent
signal detection and signal processing, calculation of assay results, and report
generation. Each of the individual array locations is separately controlled by
the microprocessor. Fluorescent signals emanating from positive test sites are
scanned, monitored and quantitated.
NANOGEN STRATEGY
Nanogen's objective is to develop commercial applications for its
proprietary platform technology and to promote its technology as the standard
for molecular identification and analysis. Key elements of the Company's
strategy to achieve this objective include the following:
Develop Research and Genomics Applications. The Company intends to pursue
the research and genomics markets by taking advantage of the open architecture
design of its technology that allows end users to customize microchips to meet
their individual research needs. The Company believes that this build-your-
own-chip capability will fulfill an unmet need for a powerful, versatile and
relatively inexpensive analytical tool. In addition, the Company believes that
acceptance of its technology by leading academic research centers will promote
more rapid commercial acceptance. The Company further believes that it has
developed a powerful tool which will enable users to develop unforeseen and
commercially attractive applications.
Develop Commercial Applications. The Company intends initially to develop
commercial applications for its platform technology in the infectious disease
diagnostic market through its joint venture with Becton Dickinson by exploiting
the increasing availability of genetic information and its relationship to human
disease. The Company also intends to leverage its technology in the rapidly
developing genetic testing, drug discovery, and pharmacogenetics markets. The
Company intends to build a recurring stream of revenue from the sale of low
cost, disposable cartridges. The Company believes that widespread market
penetration of its instruments and the open architecture of its systems will
promote sustained demand for its disposable cartridges. In addition, the
Company's semiconductor microchip manufacturing is scalable, allowing the
Company to produce substantial volumes of disposable cartridges at a low cost.
Other areas such as forensics and prenatal genetics also offer opportunities for
Nanogen's technology.
Establish Strategic Collaborations. The Company intends to continue to
enter into collaborations to expand applications of its technology platform and
to accelerate the commercialization of the Company's products. The Company is
developing products for the diagnosis of infectious disease through its joint
venture with Becton Dickinson. The Company has entered into a collaborative
research and development agreement
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<PAGE> 32
with Hoechst to develop drug discovery tools. The Company has also entered into
a collaboration agreement with Elan for genomics applications. By partnering
with these multinational healthcare companies, Nanogen believes that it can gain
broader access to global markets, without shifting its resources from the
further development of its platform technology. In addition, as part of these
arrangements, Nanogen believes it can better focus on introducing its technology
into expanding markets while its collaborative partners contribute their
technology and expertise in areas such as sales, marketing and regulatory
approvals. The Company will pursue additional collaborations in various forms,
including research and development agreements, licensing agreements and joint
ventures. The Company's collaborations permit integration of the technology and
resources of its partners with the Company's technology, while allowing the
Company, independently or with other collaborators to pursue diagnostics, drug
discovery and genomics opportunities outside the scope of these collaborations.
Develop Advanced Technologies and Point-of-Care Applications. The Company's
long term strategy is to develop sample-to-answer systems which integrate
otherwise time-consuming and labor-intensive sample preparation procedures on
the disposable cartridge through the use of active microelectronics. The Company
believes that the availability of this lab-on-a-chip technology would fulfill a
substantial unmet need in both academic research and commercial sectors.
Miniaturization of the Company's instrumentation together with this
lab-on-a-chip capability offers the potential to address the point-of-care
market.
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<PAGE> 33
APPLICATIONS AND PRODUCTS UNDER DEVELOPMENT
The Company is currently developing a broad range of applications and
products based upon the Company's platform technology, as summarized in the
following table:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
U.S.
REGULATORY
REQUIRE- CURRENT
APPLICATIONS AND PRODUCTS DESCRIPTION MENTS(1) PARTNER(2)
- --------------------------------------- ------------------------------ ---------- --------------
<S> <C> <C> <C>
INFECTIOUS DISEASE DIAGNOSTICS PANELS
Diarrheal Culture Detection of enteric bacteria 510(k)/ Becton
from stool culture PMA Dickinson
Food Pathogen Detection of enteric bacteria USDA Becton
from food culture Dickinson
Molecular Respiratory Detection of organisms PMA Becton
associated with respiratory Dickinson
infections
Antibiotic Resistance Detection of antibiotic PMA Becton
resistance Dickinson
Diarrheal Direct Direct detection of enteric PMA Becton
bacteria from stool sample Dickinson
Food Pathogen Direct Direct detection of enteric USDA Becton
bacteria from food culture Dickinson
BIOMEDICAL RESEARCH, INDUSTRIAL AND Build-your-own-chip None Elan;
GENOMICS applications University
of Texas
Southwestern
GENETIC TESTING
Hemochromatosis Detection of hereditary PMA --
hemochromatosis
Molecular Oncology Detection of cancer-related PMA --
sequences
Pharmacogenetics Prediction of drug PMA --
performance in individuals
DRUG DISCOVERY Combinatorial chemical None Hoechst
synthesis for screening
LAB-ON-A-CHIP Automated sample preparation PMA --
</TABLE>
- ---------------
(1) The FDA regulatory approval and clearance process requires many steps
before a product can be approved or cleared for marketing. Certain
products will be subject to the USDA regulatory process in order to be
marketed. The terms "510(k)" and "PMA" indicate the regulatory pathway
the Company believes will be applicable to a product, although there can
be no assurance that the FDA will agree that the pathway noted is the
appropriate pathway for the specific product. See "Risk Factors--No
Assurance of Obtaining Regulatory Approvals; Government Regulatory
Process." For a description of the terms 510(k) and PMA and the USDA
requirements, see "-- Government Regulation."
(2) For a description of the Company's collaborative arrangements, see
"--Collaborative Alliances."
- --------------------------------------------------------------------------------
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<PAGE> 34
INFECTIOUS DISEASE DIAGNOSTICS APPLICATIONS
The Company is applying its technology in the area of infectious disease to
develop automated tests to replace the manual and time-intensive procedures
currently used in hospitals and reference laboratories. The role of the clinical
microbiology laboratory is to detect, identify and determine antibiotic
sensitivity of disease causing microorganisms. To accomplish this task, colonies
of microorganisms from patient specimens are grown, or cultured, in various
growth media. Following colony growth, various direct and indirect techniques
are utilized to determine the identity and, as required, the sensitivity of the
microorganism to specific antibiotics. The entire process may take days or weeks
to complete while the patient, requiring immediate therapy, must be treated by
the clinician based upon the best clinical facts available at that time. Upon
receipt of the diagnostic analysis from the laboratory, the initial patient
treatment protocol may need to be modified in order to treat the patient
effectively.
Current culture-based methods detect a single microorganism at one time.
Because a particular infectious episode may be caused by one of many
microorganisms or several microorganisms together, multiple tests may be
required to determine the correct diagnosis. "Single tube" (one at a time) DNA
probe diagnostics, which were first introduced to the marketplace in the
mid-1980's, have been unsuccessful in displacing culture based diagnostic tests
due to their inability to identify several organisms simultaneously. Nanogen's
technology addresses shortcomings of current methods by allowing the
simultaneous analysis of multiple microorganisms from a single patient sample.
The Company believes its technology and integrated system will speed the time-
to-result for diagnostic tests and patient treatment and offer its customers the
opportunity to lower their costs and improve productivity by automating all or a
significant portion of their labor-intensive testing.
The Company, through its joint venture with Becton Dickinson, is developing
a broad range of products relating to the detection of infectious disease, each
of which may incorporate Becton Dickinson's proprietary SDA technology. The
joint venture contemplates that Nanogen will manufacture and supply the
disposable cartridge and related reagents while Becton Dickinson will
manufacture the system instrumentation and market the several infectious disease
products described below.
Diarrheal Culture Panel/Food Pathogen Panel. These panels will identify
four microorganisms commonly associated with food poisoning, or gastroenteritis:
Salmonella, Shigella, Campylobacter species and E. coli strains. The products
under development are being designed to provide test results to a physician in
approximately six hours, rather than the 24 to 72 hours required under currently
available immunoassay tests. Clinical trials are expected to commence no earlier
than 1999.
Molecular Respiratory Panel. Respiratory infections, particularly in the
very young, the critically ill and the aged, are often life-threatening. Nanogen
intends to develop a respiratory microchip to rapidly identify cause of
infection and allow the physician to provide the correct therapy in hours rather
than days, as is currently required. The Company believes that its technology
will be able to identify specific bacteria, including Group A Streptococcus, S.
aureus and E. coli, or viral pathogens from complex samples such as respiratory
tract fluids.
Antibiotic Resistance Panel. The increasing incidence of strains of
bacteria, viruses and other microorganisms resistant to antibiotic drug
therapies is a growing health care concern. The Company intends to develop a
panel to detect three principal antibiotic-resistant targets: (i)
methacillin-resistant S. aureus, a major cause of hospital acquired infections,
often adding days or weeks onto hospital stays, (ii) various microorganisms
resistant to vancomycin, an expensive antibiotic frequently used to treat
serious infections, and (iii) various microorganisms resistant to penicillin and
other B-lactam antibiotics. The Company believes that a resistance test capable
of rapid, accurate identification of both infectious bacteria and antibiotic
resistance will provide physicians with valuable information that will improve
patient care and shorten hospital stays.
Diarrheal Direct Panel/Food Pathogen Direct Panel. The Company believes
that significant time and cost savings can be achieved by replacing the
traditional sequential sample preparation and testing processes with a single
integrated diagnostic instrument. The Company believes that use of such an
integrated instrument will increase the demand for infectious disease diagnostic
testing in clinical and point-of-care settings. These products are in the early
stages of development.
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<PAGE> 35
BIOMEDICAL RESEARCH, INDUSTRIAL AND GENOMICS APPLICATIONS
Worldwide efforts, including the Human Genome Project and other public and
private genetic sequencing efforts, are identifying and sequencing genes of many
organisms. As these genes and their nucleotide sequences are identified,
additional research will focus on how the genetic content of the cell, its
genome, controls and influences biological function. Gene expression studies are
often used to elucidate which of the genes contained within the genome are
regulated during disease or in response to a variety of stimuli and how specific
mutations in a gene affect the normal expression and operation of that gene.
This basic understanding will allow the development of new diagnostic and
therapeutic approaches to cancer, inborn errors of metabolism, and other genetic
disease, according to their genetic profile.
The Company intends to pursue the research and genomics markets by taking
advantage of the open architecture design of its technology that allows end
users to customize microchips to meet their individual research needs. The
Company believes that this build-your-own-chip capability will fulfill an unmet
need for a powerful, versatile and relatively inexpensive analytical tool. The
Company has recently placed a prototype system at the University of Texas
Southwestern Medical Center ("UT Southwestern") for research studies.
Genetics research utilizing Nanogen's technology may be conducted by
genomics companies, industrial research labs and research institutions. The
Company's build-your-own-chip systems are intended to simplify genomics research
by allowing users to configure their own semiconductor microchips. These arrays
would then be used by the investigator to study gene expression in test samples,
to map or discover important genes, or for a variety of other research
applications. The Company believes that its research instrument system fulfills
a significant unmet need in the area of user definable arrays.
GENETIC TESTING APPLICATIONS
As the Human Genome Project and other public and private genetic sequencing
efforts yield increasing genetic information, the demand for genetic
predisposition testing will continue to grow. The combination of novel
therapeutic approaches, such as gene therapy, and the discovery of new genes
could lead to earlier and more precise diagnosis and more refined therapeutic
interventions which may further enhance this area as a commercial market
opportunity. Because a number of important genetic diseases are ideally suited
to diagnosis in multiplexed arrays, the Company believes that its technology
platform could contribute significantly to the expansion of testing in this
area.
The Company believes that the ability of its technology to screen
simultaneously for various DNA sequences and the ability to differentiate
between single base pair mismatches has potentially wide applicability to the
field of genetic testing. The ability to test simultaneously for many specific
mutations can be used for detecting patients predisposed to certain diseases and
for early detection of the disease itself, thereby permitting early preventive
and therapeutic intervention. For example, in cancer diagnostics, certain
mutations are indicative of a predisposition to certain types of cancer. Because
many diseases involve multiple mutations, the ability to analyze all possible
mutations has previously been expensive and impracticable. Nanogen's electronic
stringency control feature permits rapid and accurate testing for single point
mutations. The Company is currently developing products in the field of genetic
testing for hemochromatosis and molecular oncology.
Hemochromatosis. In December 1997, the Company exercised an option with
Billups-Rothenberg, Inc, ("BRI") to exclusively license certain patented
technology and has begun developing a test for hereditary hemochromatosis. This
disease is an iron metabolism disorder and represents one of the most common
inherited disorders in individuals of Northern European descent. If left
untreated, gradual accumulation of iron in the body often leads to serious
health problems such as cirrhosis, diabetes and heart failure. Many experts
believe there is a need for widespread hemochromatosis screening since simple,
periodic phlebotomies allow patients to easily manage this disease. Genetic
testing for hemochromatosis to date has been limited. The Company believes that
the demand for this testing will increase as the long term consequences of the
disease are more fully understood. The product is in the early stages of
development.
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<PAGE> 36
Molecular Oncology. Many clinically important mutations in cancerous tumors
involve discrete, single point mutations that may be predictive of certain types
of cancer and may correlate with known drug resistance patterns in specific
tumors. Nanogen's technology has the ability to rapidly detect single point
mutations in long DNA sequences. The Company's system can also analyze RNA,
another nucleic acid of diagnostic importance.
Pharmacogenetics. Pharmacogenetics refers to the way an individual person
may or may not respond to specific drugs. The Company intends to develop
pharmacogenetic products incorporating its proprietary array technology for use
in both hospital and reference laboratories, with anticipated applications in
multiple fields such as thiopurine toxicity relating to leukemia treatment, drug
metabolism, and toxicity/carcinogenicity associated with cigarette smoking.
DRUG DISCOVERY APPLICATIONS
The Company believes it has a powerful tool which will elucidate
appropriate pathways for therapeutic intervention, identify and evaluate lead
compounds and simultaneously assess the efficacy and toxicology of these
compounds in model systems. It is estimated that the preclinical drug discovery
process currently takes an average of six and one-half years. Consequently, the
Company believes there is a significant demand for improved tools which
accelerate the drug discovery process.
The Company believes the microelectronic array format and independent test
site control of the Nanogen system are ideally suited for applications in drug
discovery. The benefits of the Company's electronic technology will enable the
rapid manipulation of potential drug molecules against targets such as bacteria,
virus, tumor, or immune response cells addressed to the microchip to determine
drug efficacy, thus simplifying the drug discovery process. The combination of
electronic addressing and the electronic protection of specific areas of the
microchip allows the targeting of chemical building blocks to unique locations
on the array. The Company believes its system provides an efficient automated
method for drug lead optimization. Nanogen intends to develop a novel drug
discovery platform which can be used internally for drug screening or can be
licensed to other pharmaceutical companies. The Company has recently entered
into a collaborative research and development agreement with Hoechst to develop
applications utilizing the Company's technology in combination with Hoechst's
ELIAS and/or pRNA technology. See "-- Collaborative Alliances."
LAB-ON-A-CHIP
Patient samples are complex and comprised of a number of substances such as
proteins and carbohydrates. As a result, purification of DNA to release the
target DNA in a useable form is required prior to use in any DNA diagnostic
product. The Company's long term strategy is to develop sample-to-answer systems
which integrate otherwise time-consuming and labor-intensive sample preparation
procedures on the disposable cartridge through the use of active
microelectronics. The Company believes its proprietary microelectronic
technology can simplify the complex sample preparation process and could
potentially lead to the development of an integrated platform for point-of-care
testing.
COLLABORATIVE ALLIANCES
The Company has established collaborative alliances in certain areas of
infectious disease diagnostics, drug discovery and genomics as part of its
strategy to expand the applications and accelerate the commercialization of
products derived from its technology. The Company is developing products to
expedite the diagnosis of infectious disease through its joint venture with
Becton Dickinson. The Company has also entered into an agreement for a research
and development collaboration and the establishment of a joint venture with
Hoechst to develop drug discovery tools. Additionally, the Company has entered
into a research and development agreement with Elan for genomics applications.
BECTON, DICKINSON AND COMPANY
In May 1997, Becton Dickinson and Nanogen entered into a Collaborative
Research and Development Agreement (the "Prior R&D Agreement") to develop
products utilizing Nanogen's technology to detect
33
<PAGE> 37
microbial agents causing infectious disease and to determine their antibiotic
susceptibility or resistance. In connection with the Prior R & D Agreement,
Nanogen entered into a Series D Preferred Stock Purchase Agreement (the "Stock
Purchase Agreement") with Becton Dickinson pursuant to which Becton Dickinson
purchased 1,000,000 shares of Nanogen's Series D Preferred Stock. In addition,
Becton Dickinson agreed pursuant to the Stock Purchase Agreement to purchase
Common Stock worth an aggregate of $6.0 million directly from the Company in the
Private Placement.
As of October 1, 1997, Becton Dickinson and Nanogen entered into new
agreements which superseded the Prior R&D Agreement. Pursuant to a Master
Agreement entered into between the parties (the "Master Agreement"), Becton
Dickinson and Nanogen agreed to form The Nanogen/Becton Dickinson Partnership, a
Delaware general partnership (the "Partnership"), to develop and commercialize
products in the field of in vitro nucleic acid-based diagnostic and monitoring
technologies. The products will be based on Nanogen's proprietary semiconductor
technology and Becton Dickinson's proprietary SDA technology. NanoVenture LLC, a
Delaware limited liability company wholly-owned by Nanogen ("NanoVenture"), and
Becton Dickinson Venture LLC, a Delaware limited liability company wholly-owned
by Becton Dickinson ("Becton Dickinson Venture"), are the general partners of
the Partnership with (i) losses generally allocated in proportion to cash
funding, (ii) profits generally shared equally, and (iii) distributions
allocated 60% to Becton Dickinson Venture and 40% to NanoVenture until
unrecovered partner cash contributions are equalized and thereafter
distributions shared equally. The Master Agreement contemplates that each of the
parties will negotiate in good faith additional agreements with the Partnership
in furtherance of the Partnership's business, including license agreements,
manufacturing agreements and marketing agreements. Pursuant to the Master
Agreement, Nanogen has also granted to Becton Dickinson Venture, acting on
behalf of the Partnership, a right of first offer, under certain circumstances,
to negotiate licenses in certain limited additional fields.
Cash and certain intellectual property rights were contributed by Nanogen
and Becton Dickinson in connection with the formation of the Partnership. Upon
the successful completion of certain defined milestones by December 31, 1997 and
June 30, 1998, minimum contributions for use in the research programs
aggregating approximately $6.7 million will be contributed to the Partnership
from July 1, 1998 through April 1, 1999, of which $5.0 million is to be paid by
Becton Dickinson and $1.7 million is to be paid by Nanogen. The December 31,
1997 milestones have been achieved, however there can be no assurance that any
of the June 30, 1998 milestones will be achieved in a timely fashion, if at all.
The General Partnership Agreement also contemplates additional research funding
aggregating approximately $14.3 million during the period from July 1, 1999
through April 1, 2001 conditioned upon the achievement of certain milestones to
be mutually agreed upon by the partners. Of such amount, $10.0 million is to be
paid by Becton Dickinson and $4.3 million is to be paid by the Company. There
can be no assurances that the parties will agree to such milestones, and if
agreed upon, there can be no assurances that such milestones will be achieved in
a timely fashion, if at all.
In addition to the above described payments, Becton Dickinson and Nanogen
have agreed to contribute certain additional amounts to fund marketing and
manufacturing of products commercialized by the Partnership. The success of the
Partnership will be dependent to a significant degree upon a mutuality of
interest between Nanogen and Becton Dickinson. Becton Dickinson is a large
company with alternate opportunities competing for its resources. There can be
no assurance that Becton Dickinson will make further capital contributions or
allocate sufficient management or other resources to the Partnership to complete
the development, manufacturing and marketing of Partnership products.
The Partnership has entered into a Collaborative Research and Development
and License Agreement with Nanogen and Becton Dickinson (the "Collaborative
Agreement"), pursuant to which each of Nanogen and Becton Dickinson has granted
to the Partnership, during the life of the Partnership, certain intellectual
property and patent rights and shall conduct research and development activities
with respect to the products on behalf of the Partnership.
Concurrently with the execution of the Master Agreement, Nanogen entered
into a worldwide, royalty-bearing, nonexclusive License Agreement with Becton
Dickinson relating to Becton Dickinson's proprietary
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<PAGE> 38
SDA technology for use by Nanogen outside the Partnership in the fields of in
vitro human genetic testing and in vitro cancer diagnostics.
Certain events, including a failure by the Partnership to achieve certain
milestones set forth in the Collaborative Agreement by December 31, 1997 and by
June 30, 1998, could result in termination of the Collaborative Agreement and
the Master Agreement and a concurrent dissolution of the Partnership. There can
be no assurance that such milestones will be achieved in a timely fashion, if at
all. The failure to achieve such milestones could have a material adverse effect
on the Company's business, financial condition and results of operations.
HOECHST AG
In December 1997, the Company entered into an agreement with Hoechst
Corporate Research and Technology ("CR&T"), an affiliate of Hoechst, for an
exclusive research and development collaboration relating to new drug discovery
tools and immunodiagnostics research and the establishment of a joint venture.
The objectives of the collaboration and joint venture are to develop and
commercialize microarray platforms and related devices and applications
utilizing the Company's technology in combination with CR&T's Exponential
Library by Association of Sublibraries ("ELIAS") technology and/or pRNA
technology. CR&T's ELIAS technology is its novel combinatorial approach for drug
screening and development and its pRNA technology is a novel DNA-like molecular
recognition polymer for drug screening. The arrangements for the
commercialization of products, if any, developed as a result of the
collaboration will be negotiated by the parties prior to completion of the
research and development phase.
It is expected that the initial term of the research phase of the
collaboration will be two years. After the first year, funding for the research
phase may be terminated upon the mutual consent of the parties. Each party will
perform certain aspects of the research, with funding provided primarily by
CR&T. The agreement contemplates the formation of a joint venture to facilitate
the commercialization of products resulting from the collaboration.
Pursuant to the agreement, CR&T has agreed to purchase Common Stock worth
an aggregate of $10.0 million directly from the Company in the Private
Placement. The Company has agreed to issue to CR&T, upon the achievement of
certain milestones, warrants to purchase up to four percent of the Common Stock
based upon the number of shares of Common Stock outstanding on December 5, 1997.
Exercise prices will be set at fixed premiums to the market price on the date
such warrants are issued. The warrants will have five-year maximum terms,
subject to early expiration in the event the market price exceeds the exercise
price by a fixed percentage.
ELAN CORPORATION, PLC
In December 1997, the Company entered into a nonexclusive research and
development agreement with Elan for the development of genomics and gene
expression research tools. The agreement contemplates that Nanogen will develop
products for discrimination of sequence variations such as single nucleotide
polymorphisms, allelic variations, genotyping and mutation detection. Nanogen
will also develop products for use in expression monitoring of RNA levels for
use in gene discovery, drug discovery, target validation, animal studies and
toxicity studies. The agreement contemplates that Elan will provide Nanogen with
an aggregate of $11.0 million over the five-year term of the research program,
subject to the achievement of certain milestones. There can be no assurance that
such milestones will be achieved in a timely fashion, if at all. Nanogen will
pay Elan a royalty on net sales to third parties of any products developed
pursuant to the collaboration and shall make its instrument platform available
to Elan for beta testing. In addition, Elan has agreed pursuant to the agreement
to purchase Common Stock worth an aggregate of $5.0 million directly from the
Company in the Private Placement.
THE UNIVERSITY OF TEXAS SOUTHWESTERN MEDICAL CENTER
In July 1995, the Company entered into a collaborative research agreement
with UT Southwestern, pursuant to which the parties agreed to collaborate on the
analysis of polymorphisms and human genetic
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<PAGE> 39
linkage studies using Nanogen's technology. Under the terms of the agreement,
Nanogen is to provide its microchips, controller hardware and software in
support of research to be conducted by UT Southwestern. Additionally, the
agreement specifies that UT Southwestern is to have title to all inventions and
discoveries arising solely as a result of its research conducted thereunder,
although (i) Nanogen has the option to negotiate a license for any patented
technology, and (ii) if the parties are unable to negotiate a license on
mutually agreeable terms within a specified time period, Nanogen retains a right
of first refusal with respect to such patented technology for a period of two
years. The agreement further specifies that the parties are to have joint rights
to patents and patented technology invented jointly by Nanogen and UT
Southwestern.
RESEARCH GRANTS
The Company currently has six active research grants administered by
various governmental agencies. Two of the grants, which aggregate approximately
$4.0 million, have been entered into with ATP for the development of a fully
integrated DNA testing system and the development of automated DNA sample
processing technology. In connection with the ATP awards, the Company was
awarded grants aggregating approximately $375,000 from the California Trade and
Commerce Agency Defense Conversion Program for developing polymer based
permeation systems for use in integrated microelectronic DNA diagnostic systems.
The Company has also received two grants, one from the National Institute of
Justice ("NIJ") and one from the Bode, to evaluate the feasibility of using
Nanogen's technology to perform rapid forensic DNA tests and the development of
microelectronic systems for analysis of fingerprints. The cumulative funding of
the NIJ and Bode grants is approximately $2.1 million. Additionally, Nanogen
received a small subcontracting agreement from the Potomac Institute of Policy
Studies to develop electronic microchip based immunoassays.
RESEARCH AND PRODUCT DEVELOPMENT
As of December 31, 1997, the Company had 78 employees in research and
development, of which 36 hold Ph.D. or M.D. degrees. The Company's research and
product development organization is dedicated to developing the DNA analysis
platform, leveraging basic technology across a number of different product
areas, planning system modifications for specific applications using a common
platform and enhancing chip design and capabilities to simplify instrument
design.
The Company's research and product development efforts are focused on the
further development of the Company's proprietary technology platform as well as
specific applications of the platform. The microelectronics, systems development
and chemistry groups are focusing on moving current designs into production and
on furthering developments and enhancements of the technology platform,
including developing more sophisticated microchip designs, next generation
instrumentation and enhanced operating software. The infectious disease products
group supports the research and development efforts of the joint venture with
Becton Dickinson. The genomics group is developing programs to exploit Nanogen
technology in genomics applications, both independently and through the Elan
collaboration. The molecular biology group is developing genetic analysis and
forensic applications and integrating the Becton Dickinson SDA technology with
the Company's platform. The advanced technology group is developing an advanced
sample-to-answer system. The Company will form a group to support its drug
discovery efforts, initially including the Hoechst collaboration. The Company
also has research groups to support its research grants.
In addition to its internal research and development efforts the Company
has entered into agreements with third parties to further develop certain
aspects of its technology platform. In July 1996, the Company entered into a
letter of intent with Prolinx, Inc. ("Prolinx") for the development of an
enhanced sensitivity detection system for use with Nanogen's electronic
microchips. In December 1996, the Company and Prolinx entered into a sponsored
research agreement pursuant to which Nanogen is to fund research conducted by
Prolinx in three principal areas: (i) identification and development of
chromophore/fluorophore/luminescent detection reagents, (ii) refinement and
development of an amplification polymer, and (iii) application of Prolinx
proprietary chemical linkage system for immobilization and capture of probes
within the field of electronically addressable microarrays. Pursuant to the
sponsored research agreement, the Company is committed to spend $500,000
annually in research funding for the three year term of the agreement. The
letter of intent also contemplates a license agreement regarding the results of
the sponsored research program
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pursuant to which Nanogen will have certain exclusive and nonexclusive rights to
Prolinx technology and program inventions in certain specified fields of use.
Additionally, in February 1996, the Company entered into a design and
development agreement with RELA, Inc. ("RELA") pursuant to which RELA assisted
Nanogen in the design and development of a prototype optical detection platform
which has been integrated into the Company's instrument. The Company continues
to work with RELA on an as-needed basis.
PROPRIETARY TECHNOLOGY AND PATENTS
The Company has four issued U.S. patents, one foreign issued patent, three
indications of allowability and 14 additional patent applications pending in the
U.S. Corresponding foreign patent applications have been filed in a number of
foreign countries. Additionally, in November 1997, the Company entered into a
licensing agreement with Syntro Corporation, pursuant to which the Company
obtained an exclusive license to a patent relating to methods and means of
annealing complementary nucleic molecules. The Company's current policy is to
file patent applications on what it deems to be important technological
developments which might relate to products of the Company or methods relating
to such products. In addition to pursuing patents and patent applications
relating to its platform technology, the Company may enter into certain other
license arrangements to obtain rights to third-party intellectual property where
appropriate.
There can be no assurance that any of the Company's or its licensors'
patent applications will issue or whether any issued patents will be found valid
if challenged. In addition, there can be no assurance that the intellectual
property rights licensed by the Company will be successfully integrated into
commercial products or that others will not independently develop similar
technologies or duplicate any technology developed by the Company. Because of
the extensive time required for development, testing and regulatory review of a
potential product, it is possible that, before any of the Company's products can
be commercialized, any related patent may expire or remain in existence for only
a short period following commercialization, thus reducing any advantage of the
patent, which could adversely affect the Company's ability to protect future
product development and, consequently, its business, financial condition and
results of operations.
To date all of the Company's inventions have originated in the U.S. and all
patent applications were originally filed in the U.S. The Company also seeks to
protect these inventions through foreign counterpart applications filed in
selected other countries. Because patent applications in the U.S. are maintained
in secrecy until patents issue and since publication of discoveries in the
scientific or patent literature often lag behind actual discoveries, the Company
cannot be certain that it was the first to make the inventions covered by each
of its issued or pending patent applications or that it was the first to file
for protection of inventions set forth in such patent applications. There can be
no assurance that the Company's planned or potential products will not be
covered by third-party patents or other intellectual property rights, in which
case continued development and marketing of such products would require a
license under such patents or other intellectual property rights. There can be
no assurance that such required licenses will be available to the Company on
acceptable terms, if at all. If the Company does not obtain such licenses, it
could encounter delays in product introductions while it attempts to design
around such patents, or could find that the development, manufacture or sale of
products requiring such licenses is foreclosed. The Company is aware of certain
U.S. and European patents and patent applications owned by Isis Innovations Ltd
(E.M. Southern) that may relate to the Company's technology. The Company has
opposed one such allowed European patent which has broad claims to certain array
related technology. It is not possible to determine whether or not such claims
will be narrowed or cancelled in their entirety as a result of the opposition
proceeding or during prosecution or will be allowed and issued as patents. If
the claims of the European patent survive the opposition or if an application
relating to arrays issues in another country with claims as broad as the
European patent, the Company could be subject to infringement claims that could
delay or preclude sales of some of its anticipated products. Litigation may be
necessary to defend against or assert such claims of infringement, to enforce
patents issued to the Company, to protect trade secrets or know-how owned by the
Company or to determine the scope and validity of the proprietary rights of
others. In addition, interference proceedings declared by the USPTO may be
necessary to determine the priority of inventions with respect to patent
applications of the Company. Litigation or interference proceedings could result
in substantial costs to and diversion of effort by the Company, and could
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have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that these efforts by the
Company would be successful.
The Company may rely, in certain circumstances, on trade secrets to protect
its technology. However, trade secrets are difficult to protect. The Company
seeks to protect its proprietary technology and processes, in part, by
confidentiality agreements with its employees and certain contractors. There can
be no assurance that these agreements will not be breached, that the Company
will have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.
To the extent that the Company's employees or its consultants or contractors use
intellectual property owned by others in their work for the Company, disputes
may also arise as to the rights in related or resulting know-how and inventions.
MANUFACTURING
The Company's strategy is to source semiconductor microchip fabrication and
disposable cartridge components from third-party contract manufacturers and
provide in-house deposition of the permeation layer, placement of DNA capture
probes and final electronic assembly and testing. The instrument will be
primarily sourced from third-party contract manufacturers, after which Nanogen
will provide final assembly and testing. The Company currently fabricates
microchips in limited quantities using a number of outside contract
manufacturers and is currently qualifying new contract manufacturers for large
scale wafer fabrication. The Company believes its technology allows for large
scale microchip production at a relatively low cost. The Company believes this
scalability and low cost will be one of its principal competitive advantages and
will promote the rapid acceptance of its proprietary semiconductor-based
platform technology as an industry standard. However, there can be no assurance
the Company will be successful in achieving the ability to scale up
manufacturing capacity. Under the terms of the Company's joint venture, Becton
Dickinson is expected to manufacture the instrument for infectious disease
diagnostics.
The Company has limited experience in manufacturing as well as limited
manufacturing capacity for its products and will be required to increase its
in-house manufacturing capability to manufacture additional products. The
Company intends to commence construction of a manufacturing facility during 1998
which is expected to be completed in 1999. The Company is currently recruiting
manufacturing management personnel. If the Company is unable to increase its
in-house manufacturing capability, the Company will need to obtain alternative
manufacturing facilities or establish additional contract manufacturing for its
products.
The Company will be required to comply with QSR requirements in order to
produce products for sale in the United States and with applicable quality
system standards and directives in order to produce products for sale in the
European union. Any failure of the Company to comply with the QSR requirements
or applicable standards and directives may result in the Company being required
to take corrective actions, such as modification of its policies and procedures.
Pending such corrective actions, the Company could be unable to manufacture or
ship any products, which could have a material adverse effect on the Company's
business, financial condition and results of operation. Furthermore, the
Company's manufacturing facilities, and those of its third-party manufacturers,
are subject to periodic inspection by regulatory authorities, and its operations
must undergo QSR compliance inspections conducted by the FDA and corresponding
state agencies. Additionally, prior to approval of a PMA, the Company's and its
third-party manufacturers' facilities, procedures and practices will be subject
to preapproval QSR inspection. Failure to pass such inspections may have a
material adverse effect on the Company's business, financial condition and
results of operations.
If the Company or any of its contract manufacturers encounter future
manufacturing difficulties, including problems involving the ability to scale up
manufacturing capacity, production yields, quality control and quality
assurance, or shortages of components or qualified personnel, it could have a
material adverse effect on the Company's business, financial condition and
results of operations.
COMPETITION
The Company believes that there are no other currently available
technologies that offer a range of capabilities comparable to those offered by
the Company's technology. However, as it develops applications of
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its technology, the Company expects to encounter intense competition from a
number of companies that offer products competing in its targeted applications.
The Company anticipates that its competitors in these areas will include health
care companies that manufacture laboratory-based tests and analyzers, diagnostic
and pharmaceutical companies, as well as companies developing drug discovery
technologies. To the extent the Company is successful in developing products in
these areas, the Company will face competition from established and numerous
development-stage companies that continually enter these markets.
In many instances, the Company's competitors have substantially greater
financial, technical, research and other resources and larger, more established
marketing, sales, distribution and service organizations than the Company.
Moreover, such competitors may offer broader product lines and have greater name
recognition than the Company, and may offer discounts as a competitive tactic.
In addition, several development stage companies are currently making or
developing products that compete with or will compete with those of the Company.
There can be no assurance that the Company's competitors will not succeed in
developing or marketing technologies or products that are more effective or
commercially attractive than the Company's current or future products, or that
would render the Company's technologies and products obsolete. Also, there can
be no assurance that the Company will have the financial resources, technical
expertise or marketing, distribution or support capabilities to compete
successfully in the future. The Company's future success will depend in large
part on its ability to maintain a competitive position with respect to its
technologies in which it competes. Rapid technological development by the
Company or others may result in competing products or technology. See "Risk
Factors -- Intense Competition; Competing Technologies."
GOVERNMENT REGULATION
The Company anticipates the manufacturing, labeling, distribution and
marketing of some or all of the Company's diagnostics products will be subject
to regulation in the U.S. and in certain other countries. In addition to
clinical diagnostic markets, Nanogen also intends to pursue research,
environmental, laboratory and industrial applications for certain of its
products which may be subject to different government regulation. Aspects of the
Company's manufacturing and marketing activities may also be subject to federal,
state and local regulation by various governmental authorities.
In the U.S., the FDA regulates, as medical devices, most diagnostic tests
and in vitro reagents that are marketed as finished test kits and equipment.
Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations
promulgated thereunder, the FDA regulates the preclinical and clinical testing,
design manufacture, labeling, distribution and promotion of medical devices. The
Company will not be able to commence marketing or commercial sales in the U.S.
of new medical devices under development until it receives clearance or approval
from the FDA, which can be a lengthy, expensive and uncertain process.
Noncompliance with applicable requirements can result in, among other things,
administrative or judicially imposed sanctions such as injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing clearances or approvals, or
criminal prosecution.
In the U.S., medical devices are classified into one of three classes
(i.e., Class I, II or III) on the basis of the controls deemed necessary by the
FDA to reasonably ensure their safety and effectiveness. Class I devices are
subject to general controls (e.g., labeling, premarket notification and
adherence to QSR). Class II devices are subject to general and special controls
(e.g., performance standards, postmarket surveillance, patient registries and
FDA guidelines). Generally, Class III devices are those which must receive
premarket approval by the FDA to ensure their safety and effectiveness (e.g.,
life-sustaining, life-supporting and implantable devices or new devices which
have been found not to be substantially equivalent to a legally marketed
devices). Before a new device can be introduced in the market, the manufacturer
must generally obtain FDA clearance of a 510(k) notification or approval of a
PMA application. The Company's products will vary significantly in the degree of
regulatory approvals required. The Company believes that certain of its products
for research, industrial, genomics and drug discovery applications will not
require regulatory approvals or clearance. Certain diagnostic products will
require 510(k) approvals while other diagnostic and genetic testing products
will require PMA approvals.
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A 510(k) clearance will generally only be granted if the information
submitted to the FDA establishes that the device is "substantially equivalent"
to a legally marketed predicate device. For any devices that are cleared through
the 510(k) process, significant modifications or enhancements in the design or
intended use that could significantly affect safety or effectiveness will
require new 510(k) submissions. It generally takes from four to twelve months
from submission to obtain 510(k) premarket clearance but may take longer.
The PMA approval process is more expensive, uncertain and lengthy than the
510(k) clearance process. A PMA must prove the safety and effectiveness of the
device to the FDA's satisfaction, which typically requires extensive data,
including but not limited to, technical, preclinical, clinical trials,
manufacturing, and labeling to demonstrate the safety and effectiveness of the
device. Although clinical investigations of most devices are subject to the
investigational device exemption ("IDE") requirements, clinical investigations
of vitro diagnostic ("IVD") tests, such as the Company's products and products
under development, are exempt from the IDE requirements, including the need to
obtain the FDA's prior approval, provided the testing is noninvasive, does not
require an invasive sampling procedure that presents a significant risk, does
not intentionally introduce energy into the subject, and is not used as a
diagnostic procedure without confirmation by another medically established test
or procedure. In addition, the IVD must be labeled for research use only ("RUO")
or investigational use only ("IUO"), and distribution controls must be
established to assure that IVDs distributed for research or clinical
investigation are used only for those purposes.
There can be no assurance that with respect to any of the Company's
products in development, the FDA will not determine that the Company must adhere
to the more costly, lengthy and uncertain PMA approval process. Significant
modifications to the design, labeling or manufacturing process of an approved
device may require approval by the FDA of a PMA supplement or a new PMA
application.
After a PMA is accepted for filing, the FDA begins its review of the
submitted information, which generally takes between one and two years, but may
take significantly longer. During this review period, the FDA may request
additional information or clarification of information already provided. Also
during the review period, an advisory panel of experts from outside the FDA will
be convened to review and evaluate the application and provide recommendations
to the FDA as to the approvability of the device. There can be no assurance that
the Company will be able to obtain necessary approvals on a timely basis, if at
all, and delays in obtaining or failure to obtain such approvals, the loss of
previously obtained approvals, or failure to comply with existing or future
regulatory requirements could have an adverse effect on the Company's business,
financial condition and results of operations.
Manufacturers of medical devices for marketing in the U.S. are required to
adhere to the QSR requirements (formerly Good Manufacturing Practices), which
include testing, control and documentation requirements. Manufacturers must also
comply with Medical Device Reporting ("MDR") requirements that a manufacturer
report to the FDA any incident in which its product may have caused or
contributed to a death or serious injury, or in which its product malfunctioned
and would be likely to cause or contribute to a death or serious injury upon
recurrence. Labeling and promotional activities are subject to scrutiny by the
FDA and, in certain circumstances, by the Federal Trade Commission. Current FDA
enforcement policy prohibits the marketing of approved medical devices for
unapproved uses.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with QSR requirements, MDR requirements and other
applicable regulations. The recently finalized QSR requirements include design
controls that will likely increase the cost of compliance. There can be no
assurance that the Company will not incur significant costs to comply with laws
and regulations in the future or that such laws and regulations will not have a
material adverse effect upon the Company's business, financial condition and
results of operation.
Any of the Company's customers using its diagnostic devices for clinical
use in the U.S. may be regulated under the Clinical Laboratory Improvement
Amendments of 1988 ("CLIA"). CLIA is intended to ensure the quality and
reliability of clinical laboratories in the U.S. by mandating specific standards
in the areas of personnel qualification, administration, participation in
proficiency testing, patient test management, quality control, quality assurance
and inspections. The regulations promulgated under CLIA establish three levels
of diagnostic tests ("waived," "moderately complex" and "highly complex"), and
the standards applicable to a
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clinical laboratory depend on the level of the tests it performs. CLIA
requirements may prevent some clinical laboratories from using certain of the
Company's diagnostic products. Therefore, there can be no assurance that the
CLIA regulations and future administrative interpretations of CLIA will not have
a material adverse impact on the Company by limiting the potential market for
the Company's products.
The President recently signed into law the Food and Drug Administration
Modernization Act of 1997. This legislation makes changes to the device
provisions of the FDC Act and other provisions in the Act affecting the
regulation of devices. Among other things, the changes will affect the IDE,
510(k) and PMA processes, and also will affect device standards and data
requirements, procedures relating to humanitarian and breakthrough devices,
tracking and postmarket surveillance, accredited third-party review, and the
dissemination of off-label information. The Company cannot predict how or when
these changes will be implemented or what effect the changes will have on the
regulation of the Company's products. There can be no assurance that the new
legislation will not impose additional costs or lengthen review times for the
Company's products.
The Company's food pathogen products will be subject to the regulations of
various domestic and foreign government agencies which regulate food safety and
food adulteration, including the U.S. Department of Agriculture ("USDA").
Nanogen intends to consult with and, when appropriate, to hire personnel
with expertise in regulatory affairs to assist the Company in obtaining
appropriate regulatory approvals as required. Nanogen also intends to work with
its corporate partners that have experience in regulatory affairs to assist in
obtaining regulatory approvals for collaborative products.
SALES AND MARKETING
Pursuant to the terms of its joint venture with Becton Dickinson, the
Company's potential products relating to infectious disease will be marketed by
Becton Dickinson. Nanogen intends to market and sell other potential products
directly or indirectly through strategic alliances and distribution arrangements
with third parties, including its collaborative partners. There can be no
assurance that any efforts to establish such strategic alliances or distribution
arrangements will be successful. The Company is currently recruiting senior
marketing management personnel to formulate and implement the Company's sales
and marketing strategies.
FACILITIES
Nanogen currently leases approximately 45,000 square feet of commercial
real estate in San Diego, California, under a lease expiring in 2005. The
Company has an option to renew the lease on this facility for two additional
five-year terms. Currently, Nanogen occupies 27,000 square feet of the facility
which accommodates Nanogen's administrative offices and research and development
laboratories. The remainder of the leased premises are under construction in
anticipation of the Company's expanded research and development activities, with
occupancy expected in April 1998. The Company intends to commence construction
of a manufacturing facility in close proximity to its existing facility during
1998 which is expected to be completed in 1999. As currently planned, this new
facility will accommodate the Company's final electronic assembly, permeation
layer deposition, DNA probe placement, quality control and instrument final
assembly and testing.
EMPLOYEES
As of December 31, 1997, the Company had 90 full-time employees, of whom 37
hold Ph.D. or M.D. degrees and six hold other advanced degrees. None of the
Company's employees is covered by a collective bargaining agreement, and
management considers relations with its employees to be good.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY SCIENTIFIC PERSONNEL
The directors, executive officers and key scientific personnel of the
Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- ---------------------------------------------------
<S> <C> <C>
Directors and Executive Officers
Howard C. Birndorf.............. 47 Chairman of the Board, Chief Executive Officer and
Chief Financial Officer
Tina S. Nova, Ph.D.(1).......... 44 President, Chief Operating Officer and Director
W. J. Kitchen, Sc.D............. 55 Senior Vice President, Operations
Harry J. Leonhardt, Esq......... 41 Vice President, General Counsel and Secretary
James P. O'Connell, Ph.D........ 51 Vice President, Research and Product Development
Kieran T. Gallahue.............. 34 Vice President, Strategic Marketing
Brook H. Byers.................. 52 Director
Robert E. Curry, Ph.D.(2)....... 51 Director
Cam L. Garner(2)................ 49 Director
David G. Ludvigson.............. 47 Director
Thomas G. Lynch(1)(2)........... 41 Director
Andrew E. Senyei, M.D.(1)....... 47 Director
Key Scientific Personnel
Michael J. Heller, Ph.D......... 53 Chief Technical Officer
Donald E. Ackley, Ph.D.......... 44 Senior Director, Microelectronics
Mark L. Collins, Ph.D........... 43 Senior Director, Advanced Technology
Patrick J. Dillon, Ph.D......... 36 Senior Director, Genomics
John J. Carrino, Ph.D........... 39 Director, Assay Development
John R. Havens, Ph.D............ 40 Director, Chemistry
Michael I. Nerenberg, M.D....... 42 Director, Molecular Biology
</TABLE>
- ---------------
(1) Member of Audit Committee of the Board of Directors.
(2) Member of Compensation Committee of the Board of Directors.
Howard C. Birndorf, a founder of the Company, has served as Chairman of the
Board and Chief Executive Officer since October 1993, and Chief Financial
Officer since December 1997. He previously served as Chief Financial Officer
from September 1993 to October 1997. Mr. Birndorf was a co-founder and Chairman
Emeritus of Ligand Pharmaceuticals, Incorporated ("Ligand") where from January
1988 to November 1991 he was President and Chief Executive Officer. He was also
a co-founder, director and Executive Vice President of Gen-Probe Incorporated
("Gen-Probe"), co-founder and Vice President of Corporate Development at
Hybritech, Incorporated ("Hybritech"), co-founder and director of IDEC
Pharmaceuticals Corporation ("IDEC Pharmaceuticals") and was involved in the
formation of Gensia Pharmaceuticals, Inc. (currently known as Gensia Sicor Inc.)
where he was a director. From November 1991 to January 1994, Mr. Birndorf was
President of Birndorf Technology Development, an investment and consulting
company. He was a director of Neurocrine Biosciences, Inc., from 1992 to
December 1997 and is currently a director of the Cancer Center of the University
of California, San Diego. He is also a Presidential appointee to the U.S.
Department of Commerce Biotechnology Technical Advisory Committee, and was named
San Diego's Entrepreneur of the Year in 1989. Mr. Birndorf received an M.S. in
Biochemistry from Wayne State University.
Tina S. Nova, Ph.D. has been a director of the Company since April 1994 and
has served as President and Chief Operating Officer since February 1994. Dr.
Nova began her scientific career at Hybritech, where she was responsible for the
development of several diagnostic products commonly used in clinical
laboratories
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today. She joined Ligand as Executive Director of Development where she
developed the automated high-throughput screening assay utilized today in their
drug discovery efforts. She then joined PRIZM Pharmaceuticals ("PRIZM") from
1992 to February 1994 where she was Vice President and Chief Operating Officer.
Dr. Nova has published in numerous scientific journals, and is an inventor on
several patents and patent applications in the area of assay development. Dr.
Nova is a director of The Solaris Group, a division of Monsanto, and currently
serves on the Board of Directors of BIOCOM in San Diego, the Cancer Center of
the University of California, San Diego and the Doris Howell Foundation for
Women's Healthcare. Dr. Nova received a Ph.D. in Biochemistry from the
University of California, Riverside followed by a postdoctoral fellowship in
Dermatology and Pharmacology at New York University Medical School.
W.J. Kitchen, Sc.D. joined the Company in December 1997 as Senior Vice
President, Operations. From May 1993 to December 1997, Dr. Kitchen served as
Corporate Vice President, Director of Technology and Quality of the Automotive,
Energy and Components Sector of Motorola, Inc. ("Motorola"). He joined
Motorola's Semiconductor Products Sector in 1982 where his various positions
included Vice President, Director Strategic R&D, Vice President Technology, Vice
President, Director, Advanced Technology Center, and Director, Semiconductor R&D
Laboratories. Prior to joining Motorola, Dr. Kitchen was a Senior Executive with
the National Security Agency where he was responsible for the development and
manufacturing of secure communications equipment. He received a B.S. in
Electrical Engineering with distinction from Virginia Military Institute, an
M.S. and Doctor of Science degrees in Electrical Engineering from the University
of Virginia and an M.B.A. from the Industrial College of the Armed Forces.
Harry J. Leonhardt, Esq. has served as Vice President, General Counsel and
Secretary since July 1996. From 1990 to 1996, Mr. Leonhardt served in various
capacities at Allergan, Inc., as Senior Attorney and Head of Intellectual
Property Litigation, Assistant General Counsel and Head of Worldwide Litigation,
and during a two-year expatriate assignment at its European headquarters in
England, served as General Counsel for Allergan's European Operations. From 1983
to 1990, Mr. Leonhardt was an associate attorney with the patent firm of Lyon &
Lyon LLP in Los Angeles, where he represented a number of high technology
clients in the fields of biotechnology, pharmaceuticals, diagnostic devices,
genetic probes and genetic engineering. Mr. Leonhardt received a B.Sc. in
Pharmacy from the Philadelphia College of Pharmacy and Science and a J.D. from
the University of Southern California Law Center.
James P. O'Connell, Ph.D. has served as Vice President, Research and
Product Development since December 1994. From August 1988 to December 1994, he
was Vice President, Research and Development and Central Operations for Ortho
Diagnostic Systems, a Johnson & Johnson Company, where he was responsible for
general management of research and development, manufacturing and industrial
engineering, purchasing and procurement. Dr. O'Connell was also responsible for
the research activities of the Johnson & Johnson Biotechnology Center in La
Jolla, California. Prior to October 1988, Dr. O'Connell was Director of
Immunodiagnostics Research and Development at Becton Dickinson. He received a
M.S. and Ph.D. in Microbiology and Public Health from the University of North
Carolina.
Kieran T. Gallahue has served as Vice President, Strategic Marketing since
January 1998. From 1995 to 1997, he served as Vice President of the Critical
Care Business Unit for Instrumentation Laboratory ("IL") where he was
responsible for the worldwide strategic sales and marketing, and research and
development efforts for the product line. From 1992 to 1995, he held a variety
of sales and marketing positions within IL. In addition, Mr. Gallahue has held
various marketing positions within Procter & Gamble from 1991 to 1992 and the
General Electric Company from 1985 to 1989. Mr. Gallahue holds an MBA from the
Harvard Business School.
Brook H. Byers has been a director of the Company since 1994. Mr. Byers is
a general partner of Kleiner Perkins Caufield & Byers ("KPCB"), a venture
capital firm which he joined in 1977. He has been the founding president and
chairman of four life sciences companies: Hybritech, IDEC Pharmaceuticals,
InSite Vision Inc. and Ligand. Mr. Byers currently serves as a director of Arris
Pharmaceutical Corporation and a number of privately-held technology companies.
Mr. Byers serves on the Board of Directors of the University of California, San
Francisco Foundation.
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Robert E. Curry, Ph.D. has been a director of the Company since 1995. Dr.
Curry joined the Sprout Group ("Sprout"), a submanager of various venture
capital funds within the Donaldson, Lufkin & Jenrette organization, as a general
partner of several of the partnerships comprising Sprout in May 1991 and is
currently a divisional Vice President of DLJ Capital Corporation ("DLJ"), a
wholly-owned subsidiary of Donaldson, Lufkin & Jenrette, Inc. Prior to joining
Sprout, Dr. Curry served in various capacities with Merrill Lynch R&D Management
and Merrill Lynch Venture Capital from 1984, including as President of both
organizations from January 1990 to May 1991. Previously, Dr. Curry was a Vice
President of Becton Dickinson from May 1980 to July 1984, and General Manager of
BioRad Laboratory Inc.'s Diagnostics Systems Division from August 1976 to May
1980. He currently is a director of AutoCyte, Inc., Biocircuits Corporation,
Diatide, Inc. and Photon Technology International, Inc. Dr. Curry received a
B.S. from the University of Illinois and an M.S. and Ph.D. in Chemistry from
Purdue University.
Cam L. Garner has been a director of the Company since September 1997.
Since May 1990, Mr. Garner has been President and Chief Executive Officer of
Dura Pharmaceuticals, Inc. ("Dura") and since 1995 has served as Dura's Chairman
of the Board of Directors. Mr. Garner also currently serves as a director of
Spiros Development Corp. II, Inc., a special purpose corporation developing a
pulmonary drug delivery system. Prior to joining Dura, Mr. Garner served as
President of Syntro Corporation, a biotechnology company, from November 1987 to
June 1989. Mr. Garner is currently a director of Safeskin Corporation, a
manufacturer of medical supplies, CardioDynamics International and Trega
Biosciences, Inc. Mr. Garner received a B.S. in Biology from Virginia Wesleyan
College and an M.B.A. from Baldwin-Wallace College.
David G. Ludvigson has been a director of the Company since 1996. Since
February 1996, Mr. Ludvigson has been President and Chief Operating Officer of
NeTpower. From 1992 to 1995, Mr. Ludvigson was Senior Vice President and Chief
Financial Officer of IDEC Pharmaceuticals. Prior to that time, he served as
Senior Vice President of Sales and Marketing for Conner Peripherals and as
Executive Vice President, Chief Financial Officer and a director of MIPS
Computer Systems, Inc., a RISC microprocessor developer and systems
manufacturer. Mr. Ludvigson received a B.S. and an M.A.S. from the University of
Illinois.
Thomas G. Lynch has been a director of the Company since February 1997. Mr.
Lynch is Executive Vice President, Chief Financial Officer and a director of
Elan, a leading drug delivery and biopharmaceutical company headquartered in
Dublin, Ireland, where he is responsible for finance, treasury, strategic
planning and corporate and investor relations. He is also a member of the
executive committee of Elan's board of directors. Prior to his appointment at
Elan in 1993, Mr. Lynch was a partner with KPMG Peat Marwick where he
specialized in securities matters and business advisory and accounting services.
Mr. Lynch is also a director of Pembroke Capital Limited, Icon Research Limited,
Axogen Limited and Warner Chilcott, plc.
Andrew E. Senyei, M.D., a founder of the Company, has been a director of
the Company since September 1993. He has been a general partner of Enterprise
Management Partners, a venture capital firm, since 1988. Prior to joining
Enterprise Management Partners, Dr. Senyei was co-founder and the first
President of Molecular Biosystems, Inc. Dr. Senyei then served as Assistant
Professor in the Departments of Obstetrics, Gynecology and Pediatrics at the
University of California, Irvine. Dr. Senyei received a B.A. in Biology from
Occidental College and a M.D. from Northwestern University.
Michael J. Heller, Ph.D. is a founder of the Company and has served as its
Chief Technical Officer since September 1993. In November 1991, Dr. Heller
co-founded Nanogen's former parent company, Nanotronics, and since that time has
served as Nanotronics' Vice President for Research. Dr. Heller co-founded and
served as President and Chief Operating Officer of Integrated DNA Technologies
from 1987 to 1989, and from 1984 to 1987 served as Director of Molecular Biology
for Molecular Biosystems, Inc. Prior to 1984, he served as Supervisor of DNA
Technology and Molecular Biology for Standard Oil Company. Dr. Heller received a
Ph.D. in Biochemistry from Colorado State University.
Donald E. Ackley, Ph.D. joined the Company in June 1996 as Senior Director
of Microelectronics. Dr. Ackley served as Chief Scientist for Motorola's
Photonics Technology Center from March 1993 to May 1996 where he was responsible
for projects that included bioelectronics, chemical sensors, virtual displays,
packaging, and optoelectronic devices for data communications. From November
1990 to March 1993, Dr. Ackley served as Manager of Motorola's Optoelectronics
Device Research Group. Prior to
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<PAGE> 48
joining Motorola, Dr. Ackley worked in a wide variety of semiconductor
technologies including molecular beam epitaxy, optoelectronics devices, and
optical sensors at companies such as RCA's David Sarnoff Research Center,
Siemens Corporation and the Hewlett-Packard Company. He has also participated in
two successful start-ups in the field of semiconductor-based devices. Dr. Ackley
received a B.Sc., M.Sc. and Ph.D. from Brown University.
Mark L. Collins, Ph.D. joined the Company in July 1997 as Senior Director
of Advanced Technology. From June 1994 to July 1997, Dr. Collins was Associate
Director of Research in the Hybridization Technology Group at Chiron
Corporation, and was a Senior Scientist in the Probe Design Group from September
1991 to June 1994. Prior to that, he was Director of the Sample Processing Group
and Manager, Basic Research Group, at Gene-Trak Systems. Dr. Collins received a
Ph.D. in Biochemistry from Ohio State University.
Patrick J. Dillon, Ph.D. joined the Company in August 1997 as Senior
Director of Genomics. From March 1993 to August 1997, Dr. Dillon was employed by
Human Genome Sciences, Inc. ("HGS"), where he was Director of Gene Discovery and
Exploratory Research from July 1995 to August 1997 and was an Associate Director
of Molecular Biology from August 1993 to June 1995. Prior to his four years at
HGS, he was a Senior Scientist in the Molecular Biology Group at R.W. Johnson
Pharmaceutical Research Institute from 1992 to 1993. Dr. Dillon received a Ph.D.
in Immunology from Rush University, and from 1988 to 1992 completed Postdoctoral
Fellowships in the Department of Molecular Oncology & Virology and in the
Department of Gene Regulation at the Roche Institute of Molecular Biology.
John J. Carrino, Ph.D. joined the Company in July 1997 as Director of Assay
Development. From March 1994 to June 1997, Dr. Carrino was Section Manager,
LCR/PCR Core Technology and New Assay Development for Abbott Laboratories, where
he was responsible for the development of diagnostic assays utilizing nucleic
acid amplification methodology. Before joining Abbott in 1988 as a Senior
Molecular Biologist, Dr. Carrino was a postdoctoral fellow at the University of
Chicago in the Department of Medicine. He received a Ph.D. in
Microbiology/Immunology from Northwestern University.
John R. Havens, Ph.D. joined the Company in February 1997 as Director of
Chemistry. From September 1984 to February 1997, Dr. Havens held technical and
managerial positions at Raychem Corporation. During his tenure at Raychem, Dr.
Havens served as Principal Scientist of the Display Products Group where he led
the development of a polymerdispersed liquid crystal material designed for
compact, bright video projectors. Other assignments included the development of
a plastic display based on the laser processing of thin-film transistors, with
Lawrence Livermore National Laboratory; and the position of Quality
Assurance/Quality Control Manager of the U.S. Materials Division. Dr. Havens
received a Ph.D. in Macromolecular Science from Case Western Reserve University,
and from 1982 to 1984 served as National Research Council Postdoctoral Fellow,
Polymers Division, for the National Bureau of Standards.
Michael I. Nerenberg, M.D. joined the Company in July 1996 as Director of
Molecular Biology. From July 1989 to July 1996, Dr. Nerenberg served at the
Scripps Research Institute ("Scripps") in the Department of Neuropharmacology
and Molecular and Experimental Medicine, where he directed a research laboratory
in retroviral oncogenesis. Dr. Nerenberg was a medical staff fellow in the
laboratory of molecular virology at the National Institutes of Health until 1987
and a postdoctoral fellow at Scripps. Dr. Nerenberg received a B.A. in Chemistry
from the University of Chicago, and a M.D. from Yale University School of
Medicine. Dr. Nerenberg completed his residency in Internal Medicine at the
University of Pennsylvania in 1984.
BOARD COMMITTEES
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee, which consists of Mr. Lynch, Dr.
Senyei and Dr. Nova, reviews the results and scope of the annual audit and the
services provided by the Company's independent auditors. The Compensation
Committee, which consists of Dr. Curry, Mr. Garner and Mr. Lynch, makes
recommendations to the Board of Directors with respect to general and specific
compensation policies and practices of the Company and
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<PAGE> 49
administers the Company's 1997 Stock Incentive Plan (the "1997 Stock Plan") and
the Employee Stock Purchase Plan (the "ESPP").
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee during 1996 were Dr.
Curry, Dr. Senyei and Dr. Adams, a former director of the Company. There were no
interlocks or other relationships among the Company's executive officers and
directors that are required to be disclosed under applicable executive
compensations disclosure applications.
The Company currently has authorized eight directors. Upon the closing of
this offering, the Company will have three classes of directors serving
staggered three-year terms. All directors are elected to hold office until the
next annual meeting of stockholders of the Company in which their three-year
term expires and until their successors have been elected. Officers are elected
at the first board of directors meeting following the stockholders' meeting at
which the directors are elected and serve at the discretion of the Board of
Directors. There are no family relationships among any of the directors or
executive officers of the Company.
COMPENSATION OF DIRECTORS
Directors do not receive any fees for service on the Board of Directors,
although they are reimbursed for certain expenses incurred in connection with
attendance at Board and Committee meetings. At the time Messrs. Ludvigson, Lynch
and Garner became members of the Board of Directors, the Company granted to each
of them an option to purchase 25,000 shares of Common Stock under the Company's
1995 Stock Option/Stock Issuance Plan or the 1997 Stock Plan. All of these
options were exercisable immediately, although unvested shares issued upon
exercise are subject to repurchase by the Company. The Company's right of
repurchase lapses as to 25% of the shares covered by the respective options on
the first anniversary of the date of grant, and lapses ratably on a monthly
basis thereafter, with the repurchase right terminating in full on the fourth
anniversary of the date of grant. Directors are eligible to participate in the
Company's 1997 Stock Plan described below.
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<PAGE> 50
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer and to the Company's three other most highly compensated
executive officers other than the Chief Executive Officer whose total annual
salary and bonus exceeded $100,000, for services rendered in all capacities to
the Company during the fiscal years ended December 31, 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
----------------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#)
- --------------------------------- ----- --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Howard C. Birndorf
Chief Executive Officer and
Chief Financial Officer........ 1997 $ 285,010 $ -- (1) $ -- 656,245
1996 270,005 60,000 -- 275,000
Tina S. Nova, Ph.D.
President and Chief Operating
Officer........................ 1997 225,007 -- (1) -- 240,569
1996 198,004 39,600 -- 75,000
James P. O'Connell, Ph.D.
Vice President, Research and
Product Development............ 1997 218,007 -- (1) -- 159,144
1996 206,004 38,600 19,428(2) 50,000
Harry J. Leonhardt, Esq.
Vice President, General Counsel
and Secretary.................. 1997 190,006 20,000 (1)(3) 42,138(2) 127,800
1996 92,503(4) 20,000 20,860(2) 100,000
</TABLE>
- ---------------
(1) Bonuses for 1997 have not been determined as of the date of this filing.
(2) Amount represents reimbursement of expenses and related income taxes
incurred in relocating to San Diego.
(3) Amount represents a guaranteed portion of the 1997 bonus.
(4) Mr. Leonhardt joined the Company in July 1996. Mr. Leonhardt's salary for
1997 reflects a partial year of service.
The following tables set forth certain information as of December 31, 1997
and for the fiscal year then ended with respect to stock options granted to and
exercised by the individuals named in the Summary Compensation Table above.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION POTENTIAL REALIZABLE
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(4) VALUE AT INITIAL
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------- PUBLIC OFFERING
NAME GRANTED(#) FISCAL YEAR ($/SH)(1) DATE(2) 5%($) 10%($) PRICE($)(5)
- ---------------------- ----------- -------------- --------- ---------- -------- -------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Howard C. Birndorf.... 656,245(3) 27.5808% $ .60 5/16/07 $247,625 $627,531
Tina S. Nova, Ph.D.... 240,569(3) 10.1107 .60 5/16/07 90,776 230,043
James P. O'Connell,
Ph.D................ 159,144(3) 6.6885 .60 5/16/07 60,051 152,181
Harry J. Leonhardt,
Esq................. 127,800(3) 5.3712 .60 5/16/07 48,224 122,208
</TABLE>
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<PAGE> 51
- ---------------
(1) The exercise price on the date of grant was equal to 100% of the fair market
value on the date of grant.
(2) All options granted in 1997 have been exercised in full.
(3) These incentive stock options are exercisable in full immediately, but the
shares issued upon exercise are subject to repurchase by the Company. The
Company's right of repurchase lapses as to 25% of the shares covered by the
respective options on the first anniversary of the date of grant, and lapses
ratably on a monthly basis thereafter, with the repurchase right terminating
in full on the fourth anniversary of the date of grant. Under the terms of
the Stock Option Plans, the committee designated by the Board of Directors
to administer the Stock Option Plans retains the discretion, subject to
certain limitations within the Stock Option Plans, to modify, extend or
renew outstanding options and to reprice outstanding options. Options may be
repriced by canceling outstanding options and reissuing new options with an
exercise price equal to the fair market value on the date of reissue, which
may be lower than the original exercise price of such canceled options.
(4) The 5% and 10% assumed rates of appreciation are suggested by the rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price. There can be no
assurance that any of the values reflected in the table will be achieved.
(5) This value assumes (i) an initial public offering price of $ per
share, (ii) that the options are exercised in full and (iii) that the
Company's right of repurchase and any contractual and legal restrictions on
the sale of shares issued upon exercise do not apply.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND 1997 YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997(#) DECEMBER 31, 1997($)
------------------------ -------------------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($)(1) UNEXERCISABLE UNEXERCISABLE
- -------------------------- ----------------- -------------- ------------------------ -------------------------
<S> <C> <C> <C> <C>
Howard C. Birndorf........ 656,245(2) -- --/-- --/--
Tina S. Nova, Ph.D........ 240,569(2) -- --/-- --/--
James P. O'Connell,
Ph.D.................... 159,144(2) -- --/-- --/--
Harry J. Leonhardt,
Esq..................... 127,800(2) -- --/-- --/--
</TABLE>
- ---------------
(1) Calculated on the basis of the fair market value of the underlying
securities at the exercise date minus the exercise price.
(2) In connection with the acquisition of shares, the officer received a loan
from the Company pursuant to a five-year full recourse promissory note,
which note is secured by the shares acquired.
STOCK OPTION PLANS
1993 STOCK OPTION PLAN AND 1995 STOCK OPTION/ISSUANCE PLAN
In 1993, the Company's Board of Directors adopted the Company's 1993 Stock
Plan, and in April 1995, the Board of Directors adopted the 1995 Stock
Option/Stock Issuance Plan (the "Prior Stock Plans"). The Prior Stock Plans were
amended at various times from their adoptions to the date of this Prospectus to
increase the number of shares available under the Prior Stock Plans.
Under the Prior Stock Plans, all employees (including officers) and
directors of the Company or any subsidiary and any independent contractor or
advisor who performs services for the Company or a subsidiary were eligible to
purchase shares of Common Stock and to receive awards of shares or grants of
nonstatutory stock options ("NSOs"). Employees were also eligible to receive
grants of incentive stock options ("ISOs") intended to qualify under Section
422A of the Internal Revenue Code of 1986, as amended ("Code"). The Prior Stock
Plans are administered by a committee of the Board of Directors of the Company,
which selects
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<PAGE> 52
the persons to whom shares will be sold or awarded or options will be granted,
determines the number of shares to be made subject to each sale, award or grant,
and prescribes other terms and conditions, including the type of consideration
to be paid to the Company upon sale or exercise and vesting schedules, in
connection with each sale, award or grant.
The exercise price under the NSOs generally must be at least 85% of the
fair market value of the Common Stock on the date of grant. The exercise price
under ISOs cannot be lower than 100% of the fair market value of the Common
Stock on the date of grant and, in the case of ISOs granted to holders of more
than 10% of the voting power of the Company, not less than 110% of such fair
market value. The term of an option cannot exceed ten years, and the term of an
ISO granted to a holder of more than 10% of the voting power of the Company
cannot exceed five years. Options generally expire not later than 90 days
following a termination of employment, six months following the optionee's
disability unless extended to not later than twelve months if permitted by the
Board of Directors in accordance with the terms of the Plan, or not later than
twelve months following the optionee's death. The purchase price of shares sold
under the Prior Stock Plans generally must be at least 85% of the fair market
value of the Common Stock and, in the case of a holder of more than 10% of the
voting power of the Company, not less than 110% of such fair market value. Under
the Prior Stock Plans, options granted pursuant to the Prior Stock Plans
generally vest ratably over a period of four years.
As of December 31, 1997, the Company had outstanding options to purchase an
aggregate of 292,375 shares of Common Stock at exercise prices ranging from $.01
to $.60 per share, or a weighted average exercise price per share of $.17 under
the Prior Stock Plans. At the date of adoption of the 1997 Stock Plan of the
Company a total of 503,343 shares of Common Stock were available for future
issuance under the Prior Stock Plans, which shares are available for grants
under the 1997 Stock Plan. If any option granted under the Prior Stock Plans
expires or terminates for any reason without having been exercised in full, then
the unpurchased shares subject to that option will become available for
additional option grants under the 1997 Stock Plan, as described below.
1997 STOCK INCENTIVE PLAN
The 1997 Stock Plan was adopted by the Board of Directors and was approved
by the stockholders as of August 1, 1997 and replaces the Prior Stock Plans.
Although all future awards will be made under the 1997 Stock Plan, awards made
under the Prior Stock Plans will continue to be administered in accordance with
the 1993 Stock Plan or the 1995 Stock Option/Issuance Plan, as applicable (the
1997 Plan together with the Prior Stock Plans are referred to as the "Stock
Option Plans").
The 1997 Stock Plan authorizes a total of 3,362,012 shares of Company
Common Stock for grant. This amount will be increased by any forfeited or
unexercised shares under the Prior Stock Plans. Also, forfeited or unexercised
shares under the 1997 Stock Plan generally become available for new grants under
the 1997 Stock Plan. The 1997 Stock Plan is administered by the Board of
Directors or its delegate, currently the Compensation Committee. The Board of
Directors, or its delegate, selects the employees of the Company who will
receive awards, determines the size of any award and establishes any vesting or
other conditions. Employees, directors, consultants and advisors of the Company
(or any subsidiary of the Company) are eligible to participate in the 1997 Stock
Plan, although incentive stock options may be granted only to employees. No
individual may receive options or stock appreciation rights ("SARs") covering
more than 750,000 shares in any calendar year. The participation of the outside
directors of the Company is limited to 25% of shares available under the 1997
Stock Plan.
The 1997 Stock Plan provides for awards in the form of restricted shares,
stock units, options or SARs, or any combination thereof. No payment is required
upon receipt of an award, except that a recipient of newly issued restricted
shares must pay the par value of such restricted shares to the Company.
Restricted shares are shares of Common Stock that are subject to repurchase
by the Company at the employee's purchase price in the event that the applicable
vesting conditions are not satisfied, and they are nontransferable prior to
vesting (except for certain transfers to a trustee). Restricted shares have the
same voting and dividend rights as other shares of Common Stock.
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<PAGE> 53
The recipient of restricted shares or stock units may pay all projected
withholding taxes relating to the award with Common Stock rather than cash if
permitted by the Stock Option Committee.
Options may include NSOs as well as ISOs intended to qualify for special
tax treatment. The term of an ISO cannot exceed ten years (five years for 10%
stockholders), and the exercise price of an ISO must be equal to or greater than
the fair market value of the Common Stock on the date of grant (or 110% of fair
market value at the date of grant for 10% stockholders). The exercise price of
an NSO must be equal to or greater than the par value of the Common Stock on the
date of grant.
The exercise price of an option may be paid in any lawful form permitted by
the Board of Directors or its delegate, including (without limitation) the
surrender of shares of Common Stock or restricted shares already owned for at
least six months by the optionee. The Board of Directors or its delegate may
likewise permit optionees to satisfy their withholding tax obligation upon
exercise of an NSO by surrendering a portion of their option shares to the
Company. The 1997 Stock Plan also allows the optionee to pay the exercise price
of an option by giving "exercise/sale" or "exercise/pledge" directions. If
exercise/sale directions are given, a number of option shares sufficient to pay
the exercise price and any withholding taxes are issued directly to a securities
broker selected by the Company who, in turn, sells these shares in the open
market. The broker remits to the Company the proceeds from the sale of these
shares, and the optionee receives the remaining option shares. If
exercise/pledge directions are given, the option shares are issued directly to a
securities broker or other lender selected by the Company. The broker or other
lender will hold the shares as security and will extend credit for up to 50% of
their market value. The loan proceeds will be paid to the Company to the extent
necessary to pay the exercise price and any withholding taxes. Any excess loan
proceeds may be paid to the optionee. If the loan proceeds are insufficient to
cover the exercise price and withholding taxes, the optionee will be required to
pay the deficiency to the Company at the time of exercise.
An SAR permits the participant to elect to receive any appreciation in the
value of the underlying stock from the Company, either in shares of Common Stock
or in cash or a combination of the two, with the Board of Directors or its
delegate having the discretion to determine the form in which such payment will
be made. The amount payable on exercise of an SAR is measured by the difference
between the market value of the underlying stock at exercise and the exercise
price. SARs may, but need not, be granted in conjunction with options. Upon
exercise of an SAR granted in tandem with an option, the corresponding portion
of the related option must be surrendered and cannot thereafter be exercised.
Conversely, upon exercise of an option to which an SAR is attached, the SAR may
no longer be exercised to the extent that the corresponding option has been
exercised. A participant may receive not more than 300,000 SARs within one
calendar year. Unless otherwise permitted by the Board of Directors or its
delegate, all options and SARs are nontransferable prior to the optionee's
death.
As noted above, the Board of Directors or its delegate determines the
number of restricted shares, stock units, options or SARs to be included in the
award as well as the vesting and other conditions. The vesting conditions may be
based on the employee's service, his or her individual performance, the
Company's performance or other appropriate criteria. In general, the vesting
conditions will be based on the employee's service after the date of grant.
Vesting may be accelerated as determined by the Board of Directors or its
delegate in the event of the employee's death, disability or retirement or in
the event of a change in control with respect to the Company. The Board of
Directors has in the past granted and may in the future grant options which
provide for mandatory acceleration of vesting in the event of a change in
control.
For purposes of the 1997 Stock Plan, the term "change in control" does not
include this offering or the consequences of this offering but thereafter occurs
(i) if any person is or becomes the beneficial owner, directly or indirectly, of
at least 50% of the combined voting power of the Company's outstanding
securities ordinarily having the right to vote at elections of directors, (ii)
upon a merger or consolidation of the Company with or into another corporation
or entity or any other corporate reorganization in which over 50% of the
combined voting power of the continuing or surviving entity immediately after
the merger, consolidation or reorganization is owned by persons who were not
stockholders of the Company immediately prior to the merger, consolidation or
reorganization, or (iii) upon a change in the composition of the Board of
Directors in
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<PAGE> 54
which fewer than half of the incumbent directors had been directors 24 months
prior to the change or were elected or nominated with the affirmative votes of
directors 24 months prior to the change.
The 1997 Stock Plan provides that if any payment (or transfer) by the
Company causes the employee to recognize a "golden parachute" excise tax under
Section 4999 of the Internal Revenue Code, then the Company shall make such cash
payments as are necessary to reimburse the employee for all additional taxes
caused thereby.
The Board of Directors is authorized, within the provisions of the 1997
Stock Plan, to amend the terms of outstanding restricted shares or stock units,
to modify or extend outstanding options or SARs or to exchange new options for
outstanding options, including outstanding options with a higher exercise price
than the new options.
Members of the Company's Board of Directors who are not employees of the
Company are eligible for awards under the 1997 Stock Plan. However, such outside
directors are not eligible for ISO grants. Total shares available to outside
directors is limited to 25% of total shares available under the 1997 Stock Plan.
As of December 31, 1997, under the 1997 Stock Plan the Company had
outstanding options to purchase an aggregate of 332,716 shares of Common Stock
at an exercise price of $.60 per share. The total number of restricted shares,
stock units, options and SARs available for grant under the 1997 Stock Plan is
3,362,012 (subject to anti-dilution provisions), increased by the amount of all
remaining shares available for grant under the Prior Stock Plans as of August 1,
1997. If any restricted shares, stock units, options or SARs are forfeited, or
if options or SARs terminate for any other reason prior to exercise (other than
the exercise of a related SAR or option, and including any forfeiture or
termination under the Prior Stock Plans), then they again become available for
awards under the 1997 Stock Plan.
EMPLOYEE STOCK PURCHASE PLAN
The ESPP was adopted by the Board of Directors on November 21, 1997,
effective upon the completion of this offering. The ESPP provides employees of
the Company with an opportunity to purchase Common Stock at a discount and pay
for their purchases through payroll deductions. All expenses incurred in
connection with the implementation and administration of the ESPP will be paid
by the Company. A pool of 150,000 shares of Common Stock has been reserved for
issuance under the ESPP (subject to anti-dilution provisions). Each regular
full-time and part-time employee who works an average of over 20 hours per week
will be eligible to participate in the ESPP at the beginning of the first
participation period after the employee completes one month of service.
Eligible employees may elect to contribute up to 15% of their cash
compensation under the ESPP. Each calendar year is divided into two six-month
"accumulation periods," except that the entire period from the date of this
offering to June 30, 1998, will be a single accumulation period. At the end of
each accumulation period, the Company will apply the amount contributed by the
participant during that period to purchase shares of Common Stock for him or
her. The purchase price will be equal to 85% of the lower of (a) the market
price of Common Stock immediately before the beginning of the applicable
"offering period" or (b) the market price of Common Stock on the last business
day of the accumulation period. In general each offering period is 24 months
long, but a new offering period begins every six months. Thus up to four
overlapping periods may be in effect at the same time. If the market price of
Common Stock is lower when a subsequent offering period begins, the subsequent
offering period automatically becomes the applicable offering period. No
participant may purchase more than 2,500 shares per accumulation period, and the
value of the Common Stock purchased each calendar year (measured at the
beginning of the offering periods) may not exceed $25,000 per participant. In no
event may a participant be granted a right to purchase Common Stock under the
ESPP if such purchase would increase participant's ownership to greater than 5%.
Participants may withdraw their contributions at any time before the close of
the accumulation period. If a participant terminates employment during an
accumulation period all previous contributions made during the period will be
returned to the participant.
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<PAGE> 55
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Restated Certificate of
Incorporation that limit the liability of its directors for monetary damages for
breach of their fiduciary duty as directors, except for liability that cannot be
eliminated under the Delaware General Corporation Law ("Delaware Law"). The
Delaware Law provides that directors of a company will not be personally liable
to the Company or its stockholders for monetary damages for breach of their
fiduciary duty as directors, except for liability (i) for any breach of their
duty of loyalty to the company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) for unlawful payment of dividend or unlawful stock repurchase or
redemption, as provided Section 174 of the Delaware Law, or (iv) for any
transaction from which the director derived an improper benefit. If the Delaware
Law is amended to authorize corporate action further eliminating or limiting the
personal liability of a director, then the liability of a Company director shall
be so amended by the approval of the holders of shares representing at least
66 2/3% of the shares of the Company entitled to vote in the election of
directors, voting as one class. The provision in the Restated Certificate of
Incorporation does not eliminate a director's duty of care, and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware Law. This provision
does not affect a director's responsibilities under any other law, such as the
federal securities laws or state or federal environmental laws.
The Company's Certificate of Incorporation and Bylaws also provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by the Delaware Law. The Company has entered into separate
indemnification agreements with its directors and executive officers that could
require the Company, among other things, to indemnify them against certain
liabilities that may arise by reason of their status or service as directors and
to advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified. The Company believes that the limitation of
liability provision in its Restated Certificate of Incorporation and the
indemnification agreements will facilitate the Company's ability to continue to
attract and retain qualified individuals to serve as directors and officers of
the Company.
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CERTAIN TRANSACTIONS
PREFERRED STOCK AND WARRANT FINANCINGS
The Company issued shares of Preferred Stock and warrants between February
10, 1994 and September 23, 1997 in the following private placement transactions:
(i) an aggregate of 2,339,667 shares of Series A Preferred Stock at $1.50 per
share, (ii) an aggregate of 3,740,600 shares of Series B Preferred Stock at
$2.50 per share, (iii) an aggregate of 6,553,598 shares of Series C Preferred
Stock at $4.00 per share, and (iv) an aggregate of 1,050,000 shares of Series D
Preferred Stock at $6.00 per share. The Company also issued to purchasers of
Series B Preferred Stock warrants exercisable for an aggregate of 623,435 shares
of Common Stock at an exercise price of $.25 per share (collectively, "Common
Stock Warrants"). Certain purchasers of Series B Preferred Stock also received
warrants exercisable for an aggregate of 60,000 shares of Series B Preferred
Stock at an exercise price of $1.50 per share ("Series B Warrants") in
consideration of loans made to the Company. Each share of Preferred Stock will
convert into one share of Common Stock and each Series B Warrant will convert
into a warrant for the purchase of an equivalent number of shares of Common
Stock upon the consummation of this offering. The purchasers of Series A, Series
B, Series C and Series D Preferred Stock, the Common Stock Warrants and the
Series B Warrants include, among others, the following officers and directors of
the Company and entities who beneficially own 5% or more of the Company's Common
Stock.
<TABLE>
<CAPTION>
TOTAL
SERIES A SERIES B SERIES C SERIES D COMMON TOTAL
PREFERRED PREFERRED PREFERRED PREFERRED STOCK SERIES B
INVESTORS STOCK STOCK STOCK STOCK WARRANTS WARRANTS
- ----------------------------------- ---------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Enterprise Management Partners II,
L.P.(1).......................... 1,000,000 600,000 138,415 -- 100,000 30,000
Kleiner Perkins Caufield &
Byers VI (2)..................... 1,000,000 600,000 138,416 -- 100,000 30,000
Sprout Capital VII, L.P.(3)........ -- 1,192,000 103,061 -- 198,667 --
Interwest Partners(4).............. -- 1,000,000 86,516 -- 166,667 --
Howard C. Birndorf................. 200,000 240,000 38,064 -- 40,000 --
Harry J. Leonhardt, Esq............ -- 25,000 -- -- 4,167 --
Elan Corporation, plc(5)........... -- -- 1,250,000 -- --
Oracle Strategic Partners, LP...... -- -- 1,250,000 -- --
Becton, Dickinson and Company...... -- -- -- 1,000,000 -- --
Thomas G. Lynch(5)................. -- -- -- 33,333 -- --
Cam L. Garner...................... 16,667
</TABLE>
- ---------------
(1) Represents (i) 909,091 shares of Series A Preferred Stock, 545,455 shares of
Series B Preferred Stock, 125,832 shares of Series C Preferred Stock, 90,909
Common Stock Warrants and 27,273 Series B Warrants purchased by Enterprise
Partners II, L.P. ("Enterprise Partners"), and (ii) 90,909 shares of Series
A Preferred Stock, 54,545 shares of Series B Preferred Stock, 12,583 shares
of Series C Preferred Stock, 9,091 Common Stock Warrants and 2,727 Series B
Warrants purchased by Enterprise Associates II, L.P. ("Enterprise
Associates"). Andrew E. Senyei, a director of the Company, is a general
partner of Enterprise Management Partners II, L.P., and the general partner
of each of Enterprise Partners and Enterprise Associates.
(2) Represents (i) 867,000 shares of Series A Preferred Stock, 520,200 shares of
Series B Preferred Stock, 138,416 shares of Series C Preferred Stock, 86,700
Common Stock Warrants and 26,010 Series B Warrants purchased by Kleiner
Perkins Caufield & Byers VI ("KPCB VI"), and (ii) 133,000 shares of Series A
Preferred Stock, 79,800 shares of Series B Preferred Stock, 13,300 Common
Stock Warrants and 3,990 Series B Warrants purchased by KPCB Founders Fund
VI, L.P., which merged with and into KPCB VI in 1997. Brook H. Byers, a
director of the Company, is a General Partner of KPCB VI.
(3) Represents (i) 91,593 shares of Series B Preferred Stock, 7,919 shares of
Series C Preferred Stock and 15,266 Common Stock Warrants purchased by DLJ,
(ii) 1,100,407 shares of Series B Preferred Stock, 95,142 shares of Series C
Preferred Stock and 183,401 Common Stock Warrants purchased by Sprout
53
<PAGE> 57
Capital VII, L.P. Robert E. Curry, a director of the Company, is an officer
of DLJ, which is the Managing General Partner of Sprout Capital VII, L.P.
(4) Represents (i) 993,750 shares of Series B Preferred Stock, 85,976 shares of
Series C Preferred Stock and 165,625 Common Stock Warrant Shares purchased
by Interwest Partners V, L.P., and (ii) 6,250 shares of Series B Preferred
Stock, 540 shares of Series C Preferred Stock and 1,042 Common Stock
Warrants purchased by Interwest Investors V.
(5) Includes 1,250,000 shares of Series C Preferred Stock purchased by Elan
International Services Limited, a wholly-owned subsidiary of Elan
Corporation, plc. Thomas G. Lynch, a director of the Company, is Executive
Vice President and Chief Financial Officer of Elan Corporation, plc.
TRANSACTIONS WITH DIRECTORS, OFFICERS AND RELATED PARTIES
In September 1993, in connection with the Spin-Off, certain affiliates of
the Company received from Nanotronics an aggregate of 768,336 shares of Common
Stock, including Enterprise Partners, 434,271 shares; Enterprise Associates,
39,479 shares (both Enterprise Partners and Enterprise Associates are entities
affiliated with director Andrew Senyei); and Howard C. Birndorf, a founder of,
Chairman of the Board, Chief Executive Officer and Chief Financial Officer of
the Company, 62,527 shares.
During the period May 1993 through January 1994 salary and administrative
of $115,000 expenses were incurred by Birndorf Biotechnology Development, an
entity affiliated with Mr. Birndorf, on behalf of the Company. These expenses
were repaid to Birndorf Biotechnology Development in the form of partial
consideration for the issuance to Mr. Birndorf of 200,000 shares of the
Company's Series A Preferred Stock.
In June 1993, Enterprise Partners loaned $200,000 to the Company at an
interest rate of 5.0% per annum pursuant to a promissory note payable on demand,
which note was canceled as partial consideration for the issuance to Enterprise
of 1,000,000 shares of the Company's Series A Preferred Stock.
In January 1994, November 1994, May 1996 and December 1997, the Company
entered into agreements with Tina S. Nova, Ph.D., President and Chief Operating
Officer of the Company, Harry J. Leonhardt, Esq., Vice President, General
Counsel and Secretary of the Company, James P. O'Connell, Ph.D., Vice President,
Research and Product Development of the Company and Kieran T. Gallahue, Vice
President, Strategic Marketing of the Company, respectively, pursuant to which,
in the event of termination without cause (or if Dr. O'Connell or Mr. Leonhardt
terminates his employment for good reason), such employee will be paid an amount
equal to six months of such employee's respective base salary. Mr. Gallahue's
right to such payment expires one year from the commencement of his employment.
In addition, 50% of the remaining unvested shares purchased by Dr. O'Connell and
Mr. Leonhardt pursuant to their respective agreements will vest in the event
such employee is terminated without cause or if such employee terminates his
employment for good reason. In December 1997, the Company entered into an
agreement with W.J. Kitchen, Sc.D., Senior Vice President, Operations of the
Company pursuant to which, in the event of termination without cause within two
years of the commencement of his employment, he will be paid an amount equal to
two years of his base salary.
In February 1994, Mr. Birndorf purchased 150,107 shares of Common Stock for
$751 ($.005 per share), and in June 1995, purchased another 150,000 shares of
Common Stock for $15,000 ($.10 per share) pursuant to the Company's 1995 Stock
Option/Stock Issuance Plan. In connection with the purchase of these 150,000
shares, the Company loaned $15,000 to Mr. Birndorf at an interest rate of 6.7%
per annum pursuant to a five-year promissory note, which note is secured by the
150,000 shares of Common Stock. As of December 31, 1997, 100,000 of these shares
are vested. In August 1996, Mr. Birndorf purchased an additional 275,000 shares
of Common Stock at $.10 per share. In connection with such purchase, the Company
loaned Mr. Birndorf $27,500 at an interest rate of 6.3% per annum pursuant to a
five-year promissory note, which note is secured by the 275,000 shares of Common
Stock. Of the 275,000 shares purchased by Mr. Birndorf, 100,000 shares were
issued pursuant to the Company's 1995 Stock Option/Stock Issuance Plan. The
remaining 175,000 shares are performance-based options which vest based on the
attainment of specified milestones. As of December 31, 1997, 222,916 of these
shares are vested. In May 1997, Mr. Birndorf was granted an option to purchase
656,245 shares of Common Stock pursuant to the Company's 1997 Stock Incentive
Plan. As of December 31, 1997, 95,701 of these shares are vested.
54
<PAGE> 58
In February 1994, Dr. Nova purchased 150,107 shares of Common Stock for
$7,505 ($.05 per share). As of December 31, 1997, 143,853 of these shares are
vested. In June 1995, Dr. Nova purchased another 150,000 shares of Common Stock
for $15,000.00 ($.10 per share) pursuant to the 1995 Stock Option/Stock Issuance
Plan. In connection with the purchase of these 150,000 shares, the Company
loaned $15,000.00 to Dr. Nova at an interest rate of 6.7% per annum pursuant to
a five-year promissory note, which note is secured by the 150,000 shares of
Common Stock. As of December 31, 1997, 100,000 of these shares are vested. In
August 1996, Dr. Nova purchased an additional 75,000 shares of Common Stock at
the price of $.10 per share. In connection with such purchase, the Company
loaned Dr. Nova $7,500 at an interest rate of 6.3% per annum pursuant to a
five-year promissory note, which note is secured by the 75,000 shares of Common
Stock. Of the 75,000 shares purchased by Dr. Nova, 25,000 shares were issued
pursuant to the Company's 1995 Stock Option/Stock Issuance Plan. The remaining
50,000 shares are performance-based options which have vested based on the
attainment of certain prescribed milestones. As of December 31, 1997, 61,979 of
these shares are vested. In May 1997, Dr. Nova was granted an option to purchase
240,569 shares of Common Stock pursuant to the Company's 1997 Stock Incentive
Plan. As of December 31, 1997, 35,082 of these shares are vested.
On January 23, 1995, in connection with a bridge financing, Enterprise
Partners and KPCB VI, an entity affiliated with director Brook H. Byers, each
loaned $300,000 to the Company pursuant to a promissory note payable thirty days
after the issue date or on demand thereafter, which notes were canceled as
partial consideration for the issuance of 600,000 shares of the Company's Series
B Preferred Stock to each investor. Additionally, in connection with the
issuance of the promissory notes, the Company issued warrants to purchase 30,000
shares of Series B Preferred Stock to each investor exercisable from April 1995
to April 2000 at an exercise price of $1.50 per share.
In connection with their respective purchases of Series B Preferred Stock,
Mr. Birndorf and the entities associated with KPCB, Enterprise Partners, and
Sprout entered into a Shareholders' Agreement to vote their respective shares as
necessary to obtain or maintain a seat on the Board of Directors for the Chief
Executive Officer of the Company and at least one representative designated by
each of Enterprise Partners, KPCB and Sprout. The Agreement will terminate upon
the consummation of this offering.
In September 1996 and November 1996, entities associated with Enterprise
Partners, KPCB, Sprout, InterWest Partners, DLJ and an affiliate of DLJ and Mr.
Birndorf agreed to loan the Company an aggregate of $2.0 million to fund ongoing
operations of the Company, pursuant to demand promissory notes bearing interest
at 6% per annum, which notes and accrued interest thereon were canceled in
exchange for an aggregate of 505,161 shares of Series C Preferred Stock in
December 1996.
In May 1997, the Company entered into a series of agreements with Becton
Dickinson pursuant to which Becton Dickinson agreed to purchase 1,000,000 shares
of the Company's Series D Preferred Stock and to fund certain product
development costs. See "Business -- Collaborative Alliances -- Becton, Dickinson
and Company." Becton Dickinson has also committed to purchase shares of Common
Stock directly from the Company at a price per share equal to the price to
public for an aggregate purchase price of $6.0 million, subject to the
completion of this offering.
In November 1997 and December 1997, certain officers and directors of the
Company exercised options to purchase an aggregate of 1,553,758 shares of the
Company's Common Stock. As consideration for such shares the Company received
full recourse promissory notes, bearing interest at 6.01%, from directors and
officers Birndorf (an aggregate of 656,245 shares for $393,747) and Nova (an
aggregate of 240,569 shares for $144,341) and officers Leonhardt (127,800 shares
for $76,680), O'Connell (159,144 shares for $95,486), and Kitchen (350,000
shares for $210,000). The principal and accrued interest on such promissory
notes will be payable in November 2002 or December 2002. The payment of each
promissory note is secured by a pledge of the shares purchased by such director
and/or officer.
On December 18, 1997, the Company entered into an Agreement and Plan of
Merger with its former parent corporation, Nanotronics, Inc., a California
corporation ("Nanotronics"), pursuant to which a wholly-owned California
subsidiary of the Company will merge with and into Nanotronics, which will be
the surviving corporation. Nanotronics' assets are primarily intellectual
property and certain government grants. Andrew Senyei, a director of Nanogen, is
a director of Nanotronics and an affiliate of the principal Nanotronics
shareholders. Mr. Birndorf is a shareholder of Nanotronics. Under the Agreement
and Plan of Merger,
55
<PAGE> 59
Nanogen will issue, upon the effective date of the merger an aggregate of
200,000 shares of its Series D Preferred Stock.
In December 1997, the Company entered into a collaborative research and
development agreement with Elan. Thomas G. Lynch, a director of the Company, is
Executive Vice President, Chief Financial Officer and a director of Elan.
The Company believes that the foregoing transactions were in its best
interests. As a matter of policy these transactions were, and all future
transactions between the Company and its officers, directors or principal
stockholders will be, approved by a majority of the independent and
disinterested members of the Board of Directors, on terms no less favorable to
the Company than could be obtained from unaffiliated third parties and in
connection with bona fide business purposes of the Company.
56
<PAGE> 60
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of December 31, 1997 and as adjusted
to reflect the sale by the Company of the shares offered hereby and the Private
Placement by: (i) each person who is known by the Company to beneficially own
more than 5% of the Company's Common Stock, (ii) each of the Company's
directors, (iii) each of the Company's officers named under
"Management -- Summary Compensation Table," and (iv) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
OWNED
SHARES ----------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- -------------------------------------------------------------- ------------ -------- ---------
<S> <C> <C> <C>
Entities Affiliated with Enterprise........................... 2,342,165 12.6%
Management Partners II, L.P.(1)
7979 Ivanhoe, Suite 550
La Jolla, CA 92037
Kleiner Perkins Caufield & Byers VI(2)........................ 1,868,416 10.1%
2750 Sand Hill Road
Menlo Park, CA 94025
Howard C. Birndorf(3)(13)..................................... 1,811,943 9.8%
Nanogen, Inc.
10398 Pacific Center Court
San Diego, CA 92121
Entities Affiliated with Sprout Group(4)...................... 1,503,750 8.1%
3000 Sand Hill Road, Bldg. 4, Suite 270
Menlo Park, CA 94025
Elan Corporation, plc(5)...................................... 1,250,000 6.8%
Lincoln House
Dublin 2
Ireland
Oracle Strategic Partners, L.P................................ 1,250,000 6.8%
712 Fifth Ave., 45th Floor
New York, NY 10019
Entities Affiliated with Interwest Partners(6)................ 1,253,183 6.7%
3000 Sand Hill Road, Bldg. 4, Suite 255
Menlo Park, CA 94025
Becton, Dickinson and Company(7).............................. 1,000,000 5.4%
1 Becton Drive
Franklin Lakes, NJ 07417-1880
Hoechst AG(8)................................................. --
D-65926 Frankfurt am Main
Germany
Brook H. Byers(2)............................................. 1,868,416 10.1%
Robert E. Curry, Ph.D.(4)..................................... 1,503,750 8.1%
Cam L. Garner(9).............................................. 41,667 *
David Ludvigson............................................... 25,000 *
Thomas G. Lynch(5)(9)......................................... 1,308,333 7.1%
Tina S. Nova, Ph.D.(13)....................................... 615,676 3.3%
Andrew E. Senyei, M.D.(1)..................................... 2,342,165 12.6%
James P. O'Connell, Ph.D.(10)(13)............................. 363,811 1.9%
Harry J. Leonhardt, Esq.(11)(13).............................. 256,967 1.4%
All Directors and Executive Officers as a group (12
persons)(12)(13)............................................ 10,487,728 54.5%
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of Common Stock.
(1) Includes 2,014,649 shares held by Enterprise Partners II and 158,037 shares
held by Enterprise Partners II Associates, L.P. ("Enterprise Associates").
Also includes 118,182 shares issuable to Enterprise Partners and 11,818
shares issuable to Enterprise Associates upon the exercise of outstanding
warrants exercisable within 60 days of December 31, 1997. Andrew E. Senyei,
a director of the Company, is a general partner of Enterprise Management
Partners II, L.P., the general partner of each of Enterprise Partners and
Enterprise Associates, and as such, may be deemed to share voting and
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<PAGE> 61
investment power with respect to the shares held by such entities. Dr. Senyei
disclaims beneficial ownership of all such shares except to the extent of his
pecuniary interest therein.
(2) Includes 130,000 shares issuable to KPCB VI upon the exercise of
outstanding warrants exercisable within 60 days of December 31, 1997. Mr.
Byers is a general partner of KPCB VI, and as such, may be deemed to share
voting and investment power with respect to the shares held by such entity.
Mr. Byers disclaims beneficial ownership of all such shares except to the
extent of his pecuniary interest therein.
(3) Includes 40,000 shares issuable upon the exercise outstanding warrants
exercisable within 60 days of December 31, 1997.
(4) Includes 99,512 shares held by DLJ, 1,195,549 shares held by Sprout Capital
VII, L.P. ("Sprout Capital") and 8,689 shares held by an affiliate of DLJ.
Also includes 183,401 shares issuable to Sprout Capital and 15,266 shares
issuable to DLJ upon the exercise of outstanding warrants exercisable
within 60 days of December 31, 1997. Dr. Curry, a director of the Company,
is an officer of DLJ, the Managing General Partner of Sprout Capital, and
as such, may be deemed to share voting and investment power with respect to
the shares held by such entities. Dr. Curry disclaims beneficial ownership
of all such shares except to the extent of his pecuniary interest therein.
(5) Includes 1,250,000 shares held by Elan International Services Limited
("Elan International"). Mr. Lynch, a director of the Company, is Executive
Vice President and Chief Financial Officer of Elan, the parent company of
Elan International, and as such, may be deemed to share voting and
investment power with respect to the shares held by Elan International.
Includes shares that Elan has agreed to purchase directly from
the Company in the Private Placement. Mr. Lynch disclaims beneficial
ownership of all such shares except to the extent of his pecuniary interest
therein.
(6) Includes 1,079,726 shares held by Interwest Partners V, L.P. ("Interwest
Partners") and 6,790 shares held by its investment affiliate Interwest
Investors V ("Interwest Investors"). Also includes 165,625 shares issuable
to Interwest Partners and 1,042 shares issuable to Interwest Investors upon
the exercise of outstanding warrants exercisable within 60 days of December
31, 1997.
(7) Includes shares that Becton Dickinson has agreed to purchase
directly from the Company in the Private Placement.
(8) Includes shares that Hoechst has agreed to purchase directly from
the Company in the Private Placement.
(9) Includes 25,000 shares issuable to each of Mr. Lynch and Mr. Garner upon
the exercise of options exercisable within 60 days of December 31, 1997,
subject to repurchase of unvested shares.
(10) Includes 50,000 shares issuable upon the exercise of options within 60 days
of December 31, 1997, subject to repurchase of unvested shares, and 667
shares issuable upon the exercise of warrants exercisable within 60 days of
December 31, 1997.
(11) Includes 4,167 shares issuable upon the exercise of outstanding warrants
exercisable within 60 days of December 31, 1997.
(12) Includes an aggregate of 100,000 shares issuable upon the exercise of
options exercisable within 60 days of December 31, 1997, subject to
repurchase of unvested shares, and an aggregate of 671,501 shares issuable
upon the exercise of outstanding warrants exercisable within 60 days of
December 31, 1997.
(13) Includes unvested shares subject to repurchase by the Company at December
31, 1997, as follows: Mr. Birndorf, 662,628 shares; Dr. Nova, 274,762
shares; Dr. O'Connell, 179,687 shares; and Mr. Leonhardt, 173,747 shares.
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company, after giving effect to the conversion of all outstanding Preferred
Stock into Common Stock, and the amendment of the Company's Certificate of
Incorporation, will consist of 50,000,000 shares of Common Stock, $.001 par
value, and 5,000,000 shares of Preferred Stock, $.001 par value.
58
<PAGE> 62
COMMON STOCK
As of December 31, 1997 there were 18,459,184 shares of Common Stock
outstanding held by approximately 90 stockholders of record. Such amounts assume
the conversion of each outstanding share of Preferred Stock upon the closing of
this offering.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any then outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of the Common Stock and the Preferred Stock
are entitled to share ratably on an as-converted basis in all assets remaining
after payment of liabilities and the liquidation preference of any then
outstanding Preferred Stock. The Common Stock has no preemptive or conversion
rights or other subscription rights and there are no redemptive or sinking funds
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and the Common Stock to be outstanding upon completion of this
offering will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred
Stock will be converted into Common Stock. See Note 4 of Notes to Financial
Statements for a description of the currently outstanding Preferred Stock.
Following the conversion, the Company's Certificate of Incorporation will be
restated to delete all references to the prior series of Preferred Stock, and
5,000,000 shares of undesignated Preferred Stock will be authorized. The Board
of Directors has the authority, without further action by the stockholders, to
issue from time to time the Preferred Stock in one or more series and to fix the
number of shares, designations, preferences, powers, and relative,
participating, optional or other special rights and the qualifications or
restrictions thereof. The preferences, powers, rights and restrictions of
different series of Preferred Stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions, and purchase funds and other matters. The
issuance of Preferred Stock could decrease the amount of earnings and assets
available for distribution to holders of Common Stock or affect adversely the
rights and powers, including voting rights, of the holders of Common Stock, and
may have the effect of delaying, deferring or preventing a change in control of
the Company. The Company has no present plan to issue any shares of Preferred
Stock.
WARRANTS
As of December 31, 1997 the Company had outstanding (i) Common Stock
Warrants exercisable for an aggregate of 631,072 shares of Common Stock at
prices ranging from $.01 to $.25 per share (ii) Series B Warrants exercisable
for an aggregate of 60,000 shares of Series B Preferred Stock (which
automatically convert into warrants for the purchase of 60,000 shares of Common
Stock upon the consummation of this offering) exercisable at $1.50 per share,
and (iii) Series C Warrants exercisable for an aggregate of 9,000 shares of
Series C Preferred Stock exercisable at $4.00 per share. It is anticipated that
Common Stock Warrants and the Series C Warrants will be exercised upon the
effective date of this offering. The Series B Warrants expire in April 2000.
Pursuant to the Amended and Restated Investors' Rights Agreement, dated as of
May 5, 1997, among the Company and certain of its securityholders set forth
therein, holders of shares issuable upon exercise of certain of the Warrants are
entitled to certain demand and piggyback registration rights. See
"-- Registration Rights."
REGISTRATION RIGHTS
Pursuant to the Investors' Rights Agreement, the holders of approximately
13,751,502 shares of Common Stock, including (i) shares issued upon conversion
of the Company's Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock and (ii) 67,637 shares issuable
pursuant to exercise of the Series B Warrants and certain Common Stock Warrants
(collectively, "Registrable Shares"), or their permitted transferees, are
entitled to certain rights with respect to the registration of such
59
<PAGE> 63
shares under the Securities Act of 1933, as amended (the "Securities Act"). The
holders of the shares issued in the Private Placement will also be
entitled to similar rights with respect to the registration of such shares under
the Securities Act. If the Company proposes to register any of its securities
under the Securities Act, either for its own account or for the account of other
security holders, holders of Registrable Shares are entitled to notice of such
registration and are entitled to include, at the Company's expense, such
Registrable Shares therein, provided, among other conditions, that the
underwriters of any such offering have the right to limit the number of shares
included in such registration. In addition, commencing 180 days after the
effective date of this offering, holders of at least 20% of the Registrable
Shares then outstanding (or a lesser percent, if the anticipated aggregate
offering price of such shares, net of underwriting discounts and commissions,
would exceed $7,500,000), may require the Company to prepare and file a
registration statement under the Securities Act, at the Company's expense,
covering such Registrable Shares, and the Company is required to use its best
efforts to effect such registration, subject to certain conditions and
limitations. The Company is not obligated to effect more than two of these
stockholder-initiated registrations. Further, holders of Registrable Shares may
require the Company to file additional registration statements on Form S-3,
subject to certain conditions and limitations.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
Law, an anti-takeover law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a business combination with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes a merger, asset sale or other transaction resulting in financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior, did
own) 15% or more of the corporation's voting stock.
Upon the closing of this offering, the Company's Certification of
Incorporation will be amended to require that any action permitted to be taken
by stockholders of the Company must be effected at a duly-called annual or
special meeting of stockholders and will not be able to be effected by a consent
in writing. The Board of Directors will be composed of a classified board where
only one-third of the directors are eligible for election in any given year. The
Company's Certificate of Incorporation will also be amended to require the
approval of at least two-thirds of the total number of authorized directors in
order to adopt, amend or repeal the Company's Bylaws. In addition, the Company's
Certificate of Incorporation will similarly be amended to permit the
stockholders to adopt, amend or repeal the Company's Bylaws only upon the
affirmative vote of the holders of at least two-thirds of the voting power of
all then outstanding shares of stock entitled to vote. Lastly, the foregoing
provisions of the Certificate of Incorporation and certain other provisions
pertaining to the limitation of liability and indemnification of directors will
be able to be amended or repealed only with the affirmative vote of the holders
of at least two-thirds of the voting power of all then outstanding shares of
stock entitled to vote. These provisions may have the effect of deterring
hostile takeovers or delaying changes in control or management of the Company.
Upon the closing of this offering, the Company's Bylaws will also be
amended to contain certain of the above provisions found in the Company's
Certificate of Incorporation. The Company's Bylaws, as amended (the "Restated
Bylaws"), will not permit stockholders to call a special meeting. In addition,
the Company's Restated Bylaws will establish an advance notice procedure with
regard to the nomination, other than by or at the direction of the Board of
Directors, of candidates for election as directors and with regard to certain
matters to be brought before an annual meeting of stockholders of the Company.
Also, a director will be removable only for cause. In addition, the Restated
Bylaws will provide that the business permitted to be conducted in any annual
meeting or special meeting of stockholders will be limited to business properly
brought before the meeting.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is BankBoston, N.A.
60
<PAGE> 64
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for the Common Stock
of the Company, and no predictions can be made regarding the effect, if any,
that market sales of shares or the availability of shares for sale will have on
the market price prevailing from time to time. As described below, only a
limited number of shares will be available for sale shortly after this offering
due to certain contractual and legal restrictions on resale. Nevertheless, sales
of substantial amounts of Common Stock of the Company in the public market after
the restrictions lapse could adversely affect the prevailing market price.
Upon closing of this offering and the Private Placement, the Company will
have outstanding shares of Common Stock based on the number of shares
of Preferred Stock and Common Stock outstanding as of December 31, 1997, and
assuming no exercise of the Underwriters over-allotment option. Of these shares,
the shares of Common Stock being sold hereby, not including the
Private Placement, will be freely tradable (other than by an "affiliate" of the
Company as such term is defined in the Securities Act) without restriction or
registration under the Securities Act. All remaining shares were issued and sold
by the Company in private transactions ("Restricted Shares") and are eligible
for public sale if registered under the Securities Act or sold in accordance
with Rule 144 or Rule 701 thereunder.
The Company's directors, executive officers and certain stockholders, who
collectively hold an aggregate of shares of Common Stock, have agreed
pursuant to certain agreements that they will not sell any Common Stock owned by
them without the prior written consent of Morgan Stanley & Co. Incorporated for
a period of 180 days from the date of this Prospectus (the "Lockup Period").
Excluding the shares of Common Stock being sold hereby and the Private
Placement, the remaining 16,614,598 shares of Common Stock (excluding shares
purchased pursuant to the exercise of unvested options and subject to repurchase
by the Company) may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act. As a result of lockups with the
Underwriters and the provisions of Rule 144 and 701, additional shares will be
available for sale in the public market as follows: (i) approximately 107,102
shares will be eligible for immediate sale on the date of this Prospectus, (ii)
16,453,697 shares of Common Stock will be eligible for sale upon expiration of
the Lockup Period, and (iii) the remainder of the shares of Common Stock will be
eligible for sale from time to time thereafter upon expiration of their
respective holding periods. The holders of the shares issued in the
Private Placement will have the right to register such shares for future sale
and such shares will otherwise be eligible for sale one year from the closing
date of this offering, subject to the limitations of Rule 144. See "Description
of Capital Stock -- Registration Rights."
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, an affiliate of the Company, or a holder of
Restricted Shares who beneficially owns shares that were not acquired from the
Company or an affiliate of the Company within the previous year, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately shares immediately after this offering, assuming no
exercise of the Underwriters' over-allotment option) or the average weekly
trading volume of the Common Stock during the four calendar weeks preceding the
date on which notice of the sale is filed with the Securities and Exchange
Commission (the "Commission"). Sales under Rule 144 are subject to certain
requirements relating to manner of sale, notice and availability of current
public information about the Company. However, a person (or persons whose shares
are aggregated) who is not deemed to have been an affiliate of the Company at
any time during the 90 days immediately preceding the sale and who owns
beneficially Restricted Shares is entitled to sell such shares under Rule 144(k)
without regard to the limitations described above; provided that at least two
years have elapsed since the later of the date the shares were acquired from the
Company or from an affiliate of the Company. The foregoing is a summary of Rule
144 and is not intended to be a complete description of it.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisors prior to the closing of this
offering, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the
61
<PAGE> 65
Commission has indicated that Rule 701 will apply to stock options granted by
the Company before this offering, along with the shares acquired upon exercise
of such options. Securities issued in reliance on Rule 701 are deemed to be
Restricted Shares and, beginning 90 days after the date of this Prospectus
(unless subject to the contractual restrictions described above), may be sold by
persons other than affiliates subject only to the manner of sale provisions of
Rule 144 and by affiliates under Rule 144 without compliance with its one-year
minimum holding period requirements.
The Company intends to file a registration statement under the Securities
Act covering approximately 2,800,000 shares of Common Stock reserved for
issuance under its Stock Option Plans. Such registration statement is expected
to be filed soon after the date of this Prospectus and will automatically become
effective upon filing. Accordingly, shares registered under such registration
statement will be available for sale in the open market, unless such shares are
subject to vesting restrictions with the Company or the contractual restrictions
described above.
In addition, after this offering, the holders of approximately 13,751,502
shares of Common Stock (including 67,637 shares issuable upon the exercise of
the Series B Warrants and certain Common Stock Warrants) and the holders of the
shares issued in the Private Placement will be entitled to certain rights
to cause the Company to register the sale of such shares under the Securities
Act. Registration of such shares under the Securities Act would result in such
shares becoming freely tradable without restriction under the Securities Act
(except for shares purchased by affiliates of the Company) immediately upon the
effectiveness of such registration. See "Description of Capital
Stock -- Registration Rights."
62
<PAGE> 66
UNDERWRITERS
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated as of the date hereof, the Underwriters named below, for whom
Morgan Stanley & Co. Incorporated, Lehman Brothers Inc. and SBC Warburg Dillon
Read Inc. are serving as Representatives (the "Representatives"), have severally
agreed to purchase, and the Company has agreed to sell to them severally, the
respective numbers of shares of Common Stock set forth opposite their names
below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
-------------------------------------------------------------------- -----------
<S> <C>
Morgan Stanley & Co. Incorporated...................................
Lehman Brothers Inc.................................................
SBC Warburg Dillon Read Inc.........................................
-------
Total.....................................................
=======
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all the shares of Common Stock offered hereby (other than the shares
covered by the overallotment option described below) if any such shares are
taken.
The Underwriters propose to offer part of the shares of Common Stock
directly to the public at the public offering price set forth on the cover page
hereof and part to certain dealers at a price which represents a concession not
in excess of $ per share under the initial public offering price. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to other Underwriters or to certain other
dealers. After the initial offering of the Common Stock, the offering price and
other selling terms may from time to time be varied by the Representatives.
Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to additional shares of Common Stock at the
initial public offering price set forth on the cover page hereof, less
underwriting discounts and commissions. The Underwriters may exercise such
option solely for the purpose of covering overallotments, if any, incurred in
the sale of the shares of Common Stock offered hereby. To the extent such option
is exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number set forth next to such Underwriter's name in the preceding
table bears to the total number of shares of Common Stock offered hereby to the
Underwriters.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales in excess of five percent of the number of shares of
Common Stock offered hereby to accounts over which they exercise discretionary
authority.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
63
<PAGE> 67
See "Shares Eligible for Future Sale" for a description of certain
arrangements by which all officers, directors, stockholders and option holders
of the Company have agreed not to sell or otherwise dispose of Common Stock or
convertible securities of the Company for up to 180 days after the date of this
Prospectus without the prior consent of Morgan Stanley & Co. Incorporated. The
Company has agreed in the Underwriting Agreement that it will not, directly or
indirectly, without the prior written consent of Morgan Stanley & Co.
Incorporated, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of any shares of Common Stock or any
securities convertible into or exchangeable for Common Stock, for a period of
180 days after the date of this Prospectus, except under certain circumstances.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may overallot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
Common Stock in the offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities and may
end any of these activities at any time.
The Underwriters have reserved for sale, at the initial public offering
price, up to five percent of the Common Stock offered hereby for employees and
directors of the Company and certain others who have expressed an interest in
purchasing such shares of Common Stock in this offering. The Company has
exercised an option with BRI to exclusively license certain patented technology
for the identification of hereditary hemochromatosis. Pursuant to the terms of
the option, BRI has the right to purchase up to $490,000 of the Common Stock in
this offering. The number of shares available for sale to the general public
will be reduced to the extent such persons purchase such reserved shares. Any
reserved shares not so purchased will be offered by the Underwriters to the
general public on the same basis as other shares offered hereby.
Prior to this offering, there has been no public market for the Common
Stock of the Company. The initial public offering price for the Common Stock
will be determined by negotiations among the Company and the Representatives.
Among the factors to be considered in determining the initial public offering
price will be the future prospects of the Company and its industry in general,
sales, earnings and certain other financial and operating information of the
Company in recent periods, and the price-earnings ratios, price-sales ratios,
market prices of securities and certain financial and operating information of
companies engaged in activities similar to those of the Company. The estimated
initial public offering price range set forth on the cover page of this
Preliminary Prospectus is subject to change as a result of market conditions and
other factors.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Pillsbury Madison & Sutro
LLP, San Francisco, California. A member of Pillsbury Madison & Sutro LLP owns
5,000 shares of Common Stock. Certain legal matters in connection with this
offering will be passed upon for the Underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements of Nanogen, Inc. at December 31, 1996 and 1997 and
for each of the three years in the period ended December 31, 1997, appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
64
<PAGE> 68
The statements in this Prospectus as set forth under the captions "Risk
Factors -- Uncertainty of Patent and Proprietary Technology Protection;
Potential Inability to License Technology from Third Parties" and in
"Business -- Proprietary Technology and Patents" have been passed upon by Lyon &
Lyon LLP, Costa Mesa, California, patent counsel to the Company, and experts on
such matters, and are included herein in reliance upon its review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock offered hereby, reference is hereby
made to such Registration Statement, exhibits and schedules. Statements
contained in this Prospectus regarding the contents of any contract or other
document are not necessarily complete; with respect to each such contract or
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference. A
copy of the Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the principal office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such
material may be obtained from such office upon payment of the fees prescribed by
the Commission. In addition, the Commission maintains a World Wide Web site on
the Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
65
<PAGE> 69
NANOGEN, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................................... F-2
Balance Sheets at December 31, 1996 and 1997............................................ F-3
Statements of Operations for each of the three years in the period ended December 31,
1997.................................................................................. F-4
Statements of Stockholders' Equity for each of the three years in the period ended
December 31, 1997..................................................................... F-5
Statements of Cash Flows for each of the three years in the period ended December 31,
1997.................................................................................. F-6
Notes to Financial Statements........................................................... F-7
</TABLE>
F-1
<PAGE> 70
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Nanogen, Inc.
We have audited the accompanying balance sheets of Nanogen, Inc. as of December
31, 1996 and 1997, and the related statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nanogen, Inc. at December 31,
1996 and 1997 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
January 16, 1998
F-2
<PAGE> 71
NANOGEN, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
--------------------------- DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 16,775,228 $ 19,498,293
Grant receivables and other current assets......... 554,018 699,595
----------- -----------
Total current assets................................. 17,329,246 20,197,888
Property and equipment, net.......................... 1,315,540 2,439,941
Restricted cash...................................... 409,267 358,858
Other assets......................................... 36,225 218,376
----------- -----------
$ 19,090,278 $ 23,215,063
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 479,967 $ 597,211
Accrued liabilities................................ 1,422,533 1,008,951
Deferred revenue................................... -- 1,012,186
Current portion of capital lease obligations....... 573,641 804,495
----------- -----------
Total current liabilities............................ 2,476,141 3,422,843
Capital lease obligations, less current portion...... 934,544 1,193,221
Commitments
Stockholders' equity:
Convertible preferred stock, $.001 par value,
15,500,000 shares authorized; 10,785,428 and
13,683,865 shares issued and outstanding at
December 31, 1996 and 1997, respectively
(5,000,000 shares authorized, no shares issued
and outstanding pro forma); liquidation
preference $45,375,393 at December 31, 1997..... 10,785 13,684 $ --
Common stock, $.001 par value, 40,000,000 shares
authorized; 2,748,615 and 4,775,319 shares
issued and outstanding at December 31, 1996 and
1997, respectively (50,000,000 shares
authorized, 18,459,184 shares issued and
outstanding pro forma).......................... 2,749 4,775 18,459
Additional paid-in capital......................... 30,884,751 47,573,977 47,573,977
Deferred compensation.............................. -- (1,572,579) (1,572,579)
Notes receivable from officers..................... (68,127) (1,129,509) (1,129,509)
Accumulated deficit................................ (15,150,565) (26,291,349) (26,291,349)
----------- ----------- ------------
Total stockholders' equity........................... 15,679,593 18,598,999 $ 18,598,999
----------- ----------- ============
$ 19,090,278 $ 23,215,063
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 72
NANOGEN, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Contract and grant revenue........................... $ 317,628 $ 1,644,078 $ 2,122,912
Sponsored research................................... -- -- 1,242,810
----------- ----------- ------------
Total revenues......................................... 317,628 1,644,078 3,365,722
Operating expenses:
Research and development............................. 3,356,167 6,931,535 11,637,943
General and administrative........................... 1,645,526 2,426,923 3,843,785
----------- ----------- ------------
Total operating expenses............................... 5,001,693 9,358,458 15,481,728
----------- ----------- ------------
Loss from operations................................... (4,684,065) (7,714,380) (12,116,006)
Interest income (expense), net......................... 96,256 (63,957) 975,222
----------- ----------- ------------
Net loss............................................... $(4,587,809) $(7,778,337) $(11,140,784)
=========== =========== ============
Pro forma net loss per share........................... $ (.80)
============
Number of shares used in computing pro forma net loss
per share............................................ 14,010,242
============
</TABLE>
See accompanying notes.
F-4
<PAGE> 73
NANOGEN, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
-------------------- ------------------- PAID-IN DEFERRED FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION OFFICERS
---------- ------- --------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994............ 2,339,667 $2,339 1,377,480 $1,377 $ 3,645,382 $ -- $ --
Issuance of common stock.............. -- -- 326,500 326 23,924 -- --
Repurchase of common stock............ -- -- (6,729) (6) (330) -- --
Issuance of Series B convertible
preferred stock..................... 3,234,800 3,235 -- -- 8,047,313 -- --
Issuance of Series B convertible
preferred stock in connection with
conversion of debt.................. 240,000 240 -- -- 599,760 -- --
Exercise of stock options in exchange
for notes receivable and accrued
interest............................ -- -- 300,000 300 29,700 -- (31,008)
Net loss.............................. -- -- -- -- -- -- --
---------- ------- ---------- ------ ---------- --------- --------
Balance at December 31, 1995............ 5,814,467 5,814 1,997,251 1,997 12,345,749 -- (31,008)
Issuance of common stock.............. -- -- 425,260 425 42,101 -- --
Repurchase of common stock............ -- -- (23,896) (23) (1,560) -- --
Issuance of Series B convertible
preferred stock..................... 240,800 241 -- -- 601,609 -- --
Issuance of Series C convertible
preferred stock..................... 4,225,000 4,225 -- -- 15,842,063 -- --
Issuance of Series C convertible
preferred stock in connection with
conversion of debt.................. 505,161 505 -- -- 2,020,139 -- --
Exercise of stock options in exchange
for notes receivable and accrued
interest............................ -- -- 350,000 350 34,650 -- (37,119)
Net loss.............................. -- -- -- -- -- -- --
---------- ------- ---------- ------ ---------- --------- --------
Balance at December 31, 1996............ 10,785,428 10,785 2,748,615 2,749 30,884,751 -- (68,127)
Issuance of common stock.............. -- -- 310,648 310 129,076 -- --
Repurchase of common stock............ -- -- (45,956) (46) (4,408) -- --
Issuance of Series C preferred
stock at............................ 1,823,437 1,824 -- -- 7,173,892 -- --
Issuance of Series B preferred
stock............................... 25,000 25 -- -- 62,475 -- --
Issuance of Series D preferred
stock............................... 1,050,000 1,050 -- -- 6,286,544 -- --
Deferred compensation related to stock
options............................. -- -- -- -- 1,986,202 (1,986,202) --
Amortization of deferred
compensation........................ -- -- -- -- -- 413,623 --
Exercise of stock options in exchange
for notes receivable and accrued
interest............................ -- -- 1,762,012 1,762 1,055,445 -- (1,061,382)
Net loss.............................. -- -- -- -- -- -- --
---------- ------- ---------- ------ ---------- --------- --------
Balance at December 31, 1997............ 13,683,865 $13,684 4,775,319 $4,775 $47,573,977 $(1,572,579) $(1,129,509)
========== ======= ========== ====== ========== ========= ========
<CAPTION>
TOTAL
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
------------ -------------
<S> <C> <C>
Balance at December 31, 1994............ $(2,784,419) $ 864,679
Issuance of common stock.............. -- 24,250
Repurchase of common stock............ -- (336)
Issuance of Series B convertible
preferred stock..................... -- 8,050,548
Issuance of Series B convertible
preferred stock in connection with
conversion of debt.................. -- 600,000
Exercise of stock options in exchange
for notes receivable and accrued
interest............................ -- (1,008)
Net loss.............................. (4,587,809) (4,587,809)
------------ ----------
Balance at December 31, 1995............ (7,372,228) 4,950,324
Issuance of common stock.............. -- 42,526
Repurchase of common stock............ -- (1,583)
Issuance of Series B convertible
preferred stock..................... -- 601,850
Issuance of Series C convertible
preferred stock..................... -- 15,846,288
Issuance of Series C convertible
preferred stock in connection with
conversion of debt.................. -- 2,020,644
Exercise of stock options in exchange
for notes receivable and accrued
interest............................ -- (2,119)
Net loss.............................. (7,778,337) (7,778,337)
------------ ----------
Balance at December 31, 1996............ (15,150,565) 15,679,593
Issuance of common stock.............. -- 129,386
Repurchase of common stock............ -- (4,454)
Issuance of Series C preferred
stock at............................ -- 7,175,716
Issuance of Series B preferred
stock............................... -- 62,500
Issuance of Series D preferred
stock............................... -- 6,287,594
Deferred compensation related to stock
options............................. -- --
Amortization of deferred
compensation........................ -- 413,623
Exercise of stock options in exchange
for notes receivable and accrued
interest............................ -- (4,175)
Net loss.............................. (11,140,784) (11,140,784)
------------ ----------
Balance at December 31, 1997............ $(26,291,349) $ 18,598,999
============ ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 74
NANOGEN, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................... $(4,587,809) $ (7,778,337) $(11,140,784)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.............................. 289,572 351,003 527,381
Interest expense converted into convertible preferred
stock.................................................... -- 20,644 --
Amortization of deferred compensation...................... -- -- 413,623
Changes in operating assets and liabilities:
Accounts payable......................................... 10,521 276,329 117,244
Accrued liabilities...................................... 247,231 1,175,302 (413,582)
Unearned revenue......................................... -- -- 1,012,186
Grant receivables and other current assets............... (189,381) (181,960) (145,577)
----------- ------------ ------------
Net cash used in operating activities........................ 4,229,866 (6,137,019) (9,629,509)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment........................................ 35,797 (114,106) (492,308)
----------- ------------ ------------
Net cash used in investing activities........................ (35,797) (114,106) (492,308)
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash.............................................. 55,228 55,916 50,409
Principal payments on capital lease obligations.............. (355,993) (427,270) (669,943)
Proceeds from capital lease financing........................ -- 593,059 --
Issuance of notes payable to stockholders.................... 600,000 2,000,000 --
Issuance of common stock, net of repurchases................. 22,906 38,824 120,757
Issuance of convertible preferred stock, net of issuance
costs...................................................... 8,050,548 16,448,138 13,525,810
Other assets................................................. 4,590 -- (182,151)
----------- ------------ ------------
Net cash provided by financing activities.................... 8,377,279 18,708,667 12,844,882
----------- ------------ ------------
Increase in cash and cash equivalents........................ 4,111,616 12,457,542 2,723,065
Cash and cash equivalents at beginning of year............... 206,070 4,317,686 16,775,228
----------- ------------ ------------
Cash and cash equivalents at end of year..................... $ 4,317,686 $ 16,775,228 $ 19,498,293
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid................................................ $ 125,208 $ 188,273 $ 224,504
=========== ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Equipment acquired under capital leases...................... $ 730,100 $ 404,125 $ 1,159,474
=========== ============ ============
Issuance of convertible preferred stock in exchange for
cancellation of debt and related accrued interest.......... $ 600,000 $ 2,020,644 $ --
=========== ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 75
NANOGEN, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity
Nanogen, Inc. ("Nanogen" or the "Company") was incorporated in California
on November 6, 1991 as Nanophore, Inc. ("Nanophore"), a wholly-owned subsidiary
of Nanotronics, Inc. ("Nanotronics"), and pursuant to a Plan of Corporate
Separation and Reorganization, Nanophore issued shares of its common stock to
the Nanotronics shareholders and commenced operations as Nanogen, Inc. on
September 1, 1993. The Company was established to develop products in the area
of medical diagnostics, biomedical research, genomics, genetic testing and drug
discovery using advanced microelectronics and molecular biology. Through
December 31, 1996, the Company was considered to be in the development stage.
The Company commenced planned commercial operations upon consummation of the
collaborative agreement with Becton Dickinson in May 1997, (see Note 6), and is
no longer considered to be in the development stage.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
which include debt securities with remaining maturities of three months or less
when acquired.
Concentration of Credit Risk
Cash and cash equivalents are financial instruments which potentially
subject the Company to concentration of credit risk. The Company invests its
excess cash primarily in U.S. government securities and marketable debt
securities of financial institutions and corporations with strong credit
ratings. The Company has established guidelines relative to diversification and
maturities to maintain safety and liquidity. These guidelines are reviewed
periodically and modified to take advantage of trends in yields and interest
rates. The Company has not experienced any material losses on its investments.
At December 31, 1996 and 1997, all of the Company's investments were with
financial institutions and organizations with strong credit ratings with
maturities of ninety days or less when acquired.
Restricted Cash
During 1994, the Company obtained an irrevocable standby letter of credit
in the amount of $463,775 to secure its building lease. The letter of credit is
secured by a certificate of deposit which is shown as restricted cash in the
accompanying balance sheet. The letter of credit expires by approximately
$50,000 annually.
Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets (2 to 5 years) using the straight-line method.
Leasehold improvements are stated at cost and amortized on a straight-line basis
over the shorter of the estimated useful life of the assets or the lease term.
Revenue Recognition
Contract, grant and sponsored research revenue are recorded as the costs
and expenses to perform the research are incurred. Payments received in advance
under these arrangements are recorded as deferred revenue until the expenses are
incurred. Continuation of certain contracts, grants, and research agreements are
dependent upon the company achieving specific contractual milestones.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Segment Information. Both of
these standards are effective for fiscal years
F-7
<PAGE> 76
NANOGEN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
beginning after December 15, 1997. SFAS No. 130 requires that all components of
comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments, and
unrealized gains and losses on investments, shall be reported, net of their
related tax effect, to arrive at comprehensive income. The Company does not
believe that comprehensive income or loss will be materially different than net
income or loss. SFAS No. 131 amends the requirements for public enterprises to
report financial and descriptive information about its reportable operating
segments. Operating segments, as defined in SFAS No. 131, are components of an
enterprise for which separate financial information is available and is
evaluated regularly by the Company in deciding how to allocate resources and in
assessing performance. The financial information is required to be reported on
the basis that is used internally for evaluating the segment performance. The
Company believes it operates in one business and operating segment and does not
believe adoption of SFAS No. 131 will have a material impact on the Company's
financial statements.
Net Loss Per Share
Historical basic net loss per share is computed using the weighted average
number of common shares outstanding during the periods presented. Common
equivalent shares resulting from convertible preferred stock, options to
purchase common stock and warrants to purchase convertible preferred stock are
excluded from the computation, except that the Securities and Exchange
Commission requires common and common share equivalents issued during the
twelve-month period prior to the initial filing of a proposed public offering to
be included in the calculation as if they were outstanding for all periods
presented (using the treasury stock method and the assumed initial public
offering price).
Historical basic net loss per share information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Basic net loss per share................................. $(.66) $(1.04) $(1.40)
========= ========= =========
Shares used in computing basic net loss per share........ 6,958,890 7,460,031 7,954,975
========= ========= =========
</TABLE>
Pro Forma Net Loss Per Share
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of the convertible preferred stock, which will
convert to common stock upon completion of the Company's initial public
offering, using the as if-converted method from the original date of issuance.
Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations ("APB
25"), in accounting for its employee stock options. Under APB 25, when the
exercise price of the Company's employee stock options is not less than the fair
value of the underlying stock on the date of grant, no compensation expense is
recognized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
F-8
<PAGE> 77
NANOGEN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
liabilities and related disclosures at the date of the financial statements, and
the amounts of revenues and expenses reported during the period. Actual results
could differ from those estimates.
Pro Forma Stockholders' Equity
In November 1997, the Company reincorporated in Delaware and established
$.001 par value common and preferred stock. The accompanying financial
statements have been retroactively reclassified to reflect the effects of the
reincorporation.
In December 1997, the Board of Directors authorized management of the
Company to file a Registration Statement with the Securities and Exchange
Commission for the Company to sell shares of its common stock in an initial
public offering. If the initial public offering contemplated by this Prospectus
is consummated under the terms presently anticipated, all outstanding shares of
convertible preferred stock at December 31, 1997 will automatically convert into
13,683,865 common shares.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
---------- -----------
<S> <C> <C>
Scientific equipment............................... $1,242,172 $ 2,058,766
Office furniture and equipment..................... 706,944 945,938
Leasehold improvements............................. 49,823 646,017
---------- -----------
1,998,939 3,650,721
Less accumulated depreciation and amortization..... (683,399) (1,210,780)
---------- -----------
$1,315,540 $ 2,439,941
========== ===========
</TABLE>
3. COMMITMENTS
Licensing and Research Agreement
The Company is a party to a licensing agreement under which it has obtained
exclusive licenses to technology, or technology claimed, in certain patents and
pending patent applications. Under the terms of the agreement, the Company
issued 40,923 shares of its common stock in 1993 as a nonrefundable license fee.
At December 31, 1997, the Company is committed to expend $5.75 million over the
next six years for the further development of products utilizing the licensed
technology. The Company is also required to pay additional amounts if certain
milestones are achieved and to pay royalties on future sales, if any, on
licensed products covered by the agreement.
The Company has entered into a sponsored research agreement to develop
certain technologies. The agreement is for three years effective December 18,
1996. Under the terms of the agreement, the Company is committed to expend
$500,000 annually, payable in monthly installments of $41,667, for the term of
the agreement. The Company, at its sole discretion, may terminate the agreement
without cause at any time after the first year, with no further financial
obligations.
Leases
The Company leases its facilities and certain equipment under operating
lease agreements that expire at various dates through 2004. The minimum annual
rents are subject to specified annual rental increases. Rent expense was
$378,440, $442,560, and $460,800 in 1995, 1996, and 1997, respectively.
F-9
<PAGE> 78
NANOGEN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. COMMITMENTS (CONTINUED)
The Company leases certain equipment under capital lease obligations. Cost
and accumulation amortization of equipment under capital lease were $1,881,974
and $636,082 at December 31, 1996 and $3,364,536 and $1,141,733 at December 31,
1997, respectively.
Annual future minimum obligations for operating and capital leases as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL
OPERATING LEASE
LEASES OBLIGATIONS
---------- -----------
<S> <C> <C>
YEAR ENDING DECEMBER 31:
1998.............................................. $ 561,434 $1,006,136
1999.............................................. 604,881 724,608
2000.............................................. 624,694 500,285
2001.............................................. 639,094 136,855
2002.............................................. 664,495 --
Thereafter........................................ 1,591,253 --
---------- ----------
Total minimum lease payments...................... $4,685,851 2,367,884
==========
Less amount representing interest................. 370,168
----------
Present value of future minimum capital lease
obligations.................................... 1,997,716
Less amounts due in one year...................... 804,495
----------
Long term portion of capital lease obligations.... $1,193,221
==========
</TABLE>
As of December 31, 1997, the Company has approximately $3.1 million of
available funding under equipment lease lines.
4. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
A summary of Convertible Preferred Stock issued and outstanding as of
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
LIQUIDATION
SHARES PREFERENCE
----------- -----------
<S> <C> <C>
Series A......................................... 2,339,667 $ 3,509,501
Series B......................................... 3,740,600 9,351,500
Series C......................................... 6,553,598 26,214,392
Series D......................................... 1,050,000 6,300,000
---------- -----------
13,683,865 $45,375,393
========== ===========
</TABLE>
In 1995, in connection with the sale of Series B Convertible Preferred
Stock, the Company issued warrants to purchase 579,135 shares of common stock
exercisable from February 1997 to September 2000 at an exercise price of $.25
per share. Additionally, in connection with the issuance of notes payable which
were converted to Series B Convertible Preferred Stock, the Company issued
warrants to purchase 60,000 shares of Series B Convertible Preferred Stock
exercisable from April 1995 to April 2000 at an exercise price of $1.50 per
share.
In 1996, in connection with the sale of Series B Convertible Preferred
Stock, the Company issued warrants to purchase 40,133 shares of common stock
exercisable from February 1997 to September 2001 at an exercise price of $.25
per share.
F-10
<PAGE> 79
NANOGEN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
In 1997, in connection with the sale of Series B Convertible Preferred
Stock, the Company issued warrants to purchase 4,167 shares of common stock
exercisable from August 1997 to August 2002 at an exercise price of $.25 per
share.
The Series A, B, C and D Convertible Preferred Stock are convertible, at
the option of the holder, into 2,339,667, 3,740,600, 6,553,598 and 1,050,000
shares, respectively, of common stock, subject to certain anti-dilution
adjustments. The Series A, B, C and D Convertible Preferred Stock are
automatically convertible into common stock, at the then applicable conversion
rate, upon the closing of an underwritten public offering of shares of common
stock of the Company for total gross offering proceeds of not less than
$7,500,000, but only if the public offering price of the Company's common stock
in such offering is not less than $7.50 per share.
Noncumulative annual dividends of $.12, $.20, $.32 and $.48 per share are
payable on the Series A, B, C and D Convertible Preferred Stock, respectively,
whenever funds are legally available, when and if declared by the Board of
Directors.
Warrants
In addition to the warrants issued in connection with the sale of
Convertible Preferred Stock, the Company issued warrants in connection with
certain financing arrangements. In 1991, a warrant was issued to purchase 7,637
shares of common stock exercisable through September 1999 at an exercise price
of $.01. In 1996, a warrant was issued to purchase 9,000 shares of Series C
Convertible Preferred Stock exercisable through the earlier of August 2002 or
upon completion of an initial public offering at an exercise price of not less
than $4.00.
Stock Option Plans
Under the Company's 1993 Stock Option Plan (the "1993 Plan"), as amended in
April 1995, 982,007 shares of common stock were reserved for issuance upon
exercise of stock options granted by the Company. In April 1995, the Board of
Directors adopted the 1995 Stock Option/Stock Issuance Plan (the "1995 Plan")
under which 500,000 shares of common stock were reserved for issuance. In April
1996, an additional 975,000 shares of common stock were reserved for issuance
under the 1995 Plan. The plans provide for the grant of stock options to
officers, directors, and employees of, and consultants and advisors to, the
Company. In August 1997, the Board of Directors adopted the 1997 Stock Incentive
Plan (the "1997 Plan" and together with the 1993 Plan and 1995 Plan, the "Stock
Option Plans"), under which 2,462,012 shares of common stock were reserved for
issuance upon exercise of stock options granted by the Company. In November
1997, an additional 900,000 shares were reserved for issuance under the 1997
Plan.
The exercise price of incentive stock options to be granted under the Stock
Option Plans shall not be less than 100% of the fair value of such shares on the
date of grant. The exercise price of nonqualified stock options to be granted
under the plans shall not be less than 85% of the fair value of such shares on
the date of grant. The options are generally exercisable immediately; however,
the shares generally vest at the rate of one fourth after one year and the
remainder ratably over the remaining three years. Options granted have a term of
up to ten years.
F-11
<PAGE> 80
NANOGEN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
As of December 31, 1997, 1,638,189 shares are available for future grant
under the Stock Option Plans. The following table summarizes stock option
activity through December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF PRICE PER
SHARES SHARE
---------- ---------
<S> <C> <C>
Outstanding at December 31, 1994.................... 138,000 $.05
Granted........................................... 695,300 $.10
Exercised......................................... (626,500) $.09
Cancelled......................................... (35,000) $.10
----------
Outstanding at December 31, 1995.................... 171,800 $.10
Granted........................................... 997,745 $.10
Exercised......................................... (775,260) $.10
Cancelled......................................... (43,460) $.10
----------
Outstanding at December 31, 1996.................... 350,825 $.10
Granted........................................... 2,379,351 $.59
Exercised......................................... (2,072,660) $.57
Cancelled......................................... (32,425) $.35
----------
Outstanding at December 31, 1997.................... 625,091 $.40
==========
</TABLE>
As of December 31, 1997, 1,326,346 shares issued pursuant to early
exercises of options or issuable under outstanding options were vested. The
Company has the option to repurchase, at the original issue price, the unvested
shares issued pursuant to early exercise of options in the event of termination
of employment or engagement. At December 31, 1997, 2,315,893 shares issued under
the Stock Option Plans were subject to repurchase by the Company.
The Company recognized an aggregate of $1,986,202 through December 31, 1997
as deferred compensation for the excess of the deemed fair value for financial
statement presentation purposes of the common stock issuable on exercise of such
options over the exercise price. Compensation expense related to options granted
during the year ended December 31, 1997 was $413,623. The deferred compensation
expense is being recognized over the vesting period of the options.
Following is a further breakdown of the options outstanding as of December
31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE WEIGHTED EXERCISE
RANGE OF REMAINING AVERAGE PRICE OF
EXERCISE OPTIONS LIFE IN EXERCISE OPTIONS OPTIONS
PRICES OUTSTANDING YEARS PRICE EXERCISABLE EXERCISABLE
- ---------- ----------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ .01 6,000 5.67 $.01 6,000 $.01
$ .10 216,625 7.06 $.10 216,625 $.10
$ .25 35,800 9.10 $.25 35,800 $.25
$ .60 366,666 9.69 $.60 366,666 $.60
------- -------
$.01-.60 625,091 8.71 $.40 625,091 $.40
======= =======
</TABLE>
Adjusted pro forma information regarding net loss is required by SFAS 123
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of SFAS 123. The fair value for these
options was estimated at the date of grant using the Minimum Value method for
option pricing
F-12
<PAGE> 81
NANOGEN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
with the following assumptions for 1995, 1996 and 1997: a risk-free interest
rate of 6.5%, a dividend yield of 0% and a weighted average expected life of the
option of five years.
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options are amortized to expense over the vesting period. The Company's
adjusted pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Adjusted pro forma net loss.......... $(4,588,195) $(7,780,757) $(11,186,029)
Adjusted pro forma net loss per
share.............................. $(.66) $(.58) $(.80)
</TABLE>
The weighted average fair value of options granted during 1995, 1996 and
1997 was $.01, $.01 and $(.16), respectively.
The pro forma effect on net loss for 1995, 1996 and 1997 is not likely to
be representative of the pro forma effects on reported net income or loss in
future years because these amounts reflect 3 or fewer years of vesting.
Shares Reserved for Future Issuance
The following shares of common stock are reserved for future issuance at
December 31, 1997:
<TABLE>
<S> <C>
Convertible preferred stock.............................. 13,683,865
Stock options............................................ 2,263,280
Warrants................................................. 700,072
----------
16,647,217
==========
</TABLE>
Nanotronics
In December 1997, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with Nanotronics, pursuant to which a wholly-owned California
subsidiary of the Company will merge with and into Nanotronics. Upon the
effective date of the merger, the Company will issue 200,000 shares of its
Series D Convertible Preferred Stock at $6.00 per share in exchange for all of
the outstanding shares of Nanotronics. The transaction will be accounted for
using the purchase method. The operations and net assets of Nanotronics are not
material to the Company's financial position or results of operations. The
purchase price of $1.2 million will be allocated primarily to acquired
in-process technology and will be reflected as a charge in the Company's
statement of operations upon closing, which is expected to be in the first
quarter of 1998.
5. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1996 and 1997 are shown below. A valuation allowance of
$11,279,000, of which $4,783,000 relates to 1997, as of
F-13
<PAGE> 82
NANOGEN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
December 31, 1997 has been recognized to offset the deferred tax assets as
realization of such assets is uncertain.
<TABLE>
<CAPTION>
1996 1997
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 5,477,000 $ 9,120,000
Research and development credits....................... 533,000 1,146,000
Capitalized research expenses.......................... 540,000 1,050,000
Other.................................................. 61,000 114,000
----------- ------------
Total deferred tax assets................................ 6,611,000 11,430,000
Valuation allowance for deferred tax assets.............. (6,496,000) (11,279,000)
----------- ------------
Net deferred tax assets.................................. 115,000 151,000
Deferred tax liabilities:
Depreciation........................................... (115,000) (151,000)
----------- ------------
Net deferred tax assets.................................. $ -- $ --
=========== ============
</TABLE>
At December 31, 1997, the Company has federal and California net operating
loss carryforwards of approximately $25,048,000 and $6,143,000, respectively.
The difference between the federal and California tax loss carryforwards is
primarily attributable to the capitalization of research and development
expenses for California tax purposes and the fifty percent limitation on
California loss carryforwards. The federal and California tax loss carryforwards
will begin expiring in 2006 and 1998, respectively, unless previously utilized.
The Company also has federal and California research and development tax credit
carryforwards of approximately $820,000 and $502,000, respectively, which will
begin expiring in 2007 unless previously utilized.
Under Sections 382 and 383 of the Internal Revenue Code, the annual use of
the Company's net operating loss and credit carryforwards may be limited because
of cumulative changes in ownership of more than 50% which occurred during 1995
and 1997. However, the Company does not believe such limitations will have a
material impact upon the ultimate utilization of these carryforwards.
6. SPONSORED RESEARCH AGREEMENTS
Becton, Dickinson and Company
In May 1997, Becton, Dickinson and Company ("Becton Dickinson") and Nanogen
entered into a Collaborative Research and Development Agreement to develop
products utilizing Nanogen's technology to detect microbial agents causing
infectious disease to determine their antibiotic susceptibility or resistance
(the "Prior R&D Agreement"). In connection with the Prior R&D Agreement, Nanogen
entered into a Series D Preferred Stock Purchase Agreement (the "Stock Purchase
Agreement") with Becton Dickinson pursuant to which Becton Dickinson purchased
1,000,000 shares of Nanogen's Series D Preferred Stock for $6.0 million. In
addition, Becton Dickinson agreed, pursuant to the Stock Purchase Agreement, to
purchase common stock worth an aggregate of $6.0 million, at the initial public
offering price, upon the completion of this offering. This purchase will be made
as part of a private placement (the "Private Placement") concurrent with this
offering.
As of October 1, 1997, Becton Dickinson and Nanogen entered into new
agreements which superseded the Prior R&D Agreement. Pursuant to a Master
Agreement entered into between the parties (the "Master Agreement"), Becton
Dickinson and Nanogen agreed to form The Nanogen/Becton Dickinson Partnership, a
Delaware general partnership (the "Partnership") to develop and commercialize
products in the field of in vitro nucleic acid-based diagnostic and monitoring
technologies. NanoVenture LLC, a Delaware limited liability company wholly-owned
by Nanogen ("NanoVenture") and Becton Dickinson Venture LLC, a Delaware limited
liability company wholly-owned by Becton Dickinson ("Becton Dickinson Venture"),
are
F-14
<PAGE> 83
NANOGEN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SPONSORED RESEARCH AGREEMENTS (CONTINUED)
the general partners of the Partnership with (i) losses allocated in proportion
to cash funding, (ii) profits shared equally, and (iii) distributions allocated
60% to Becton Dickinson and 40% to NanoVenture until partner contributions are
equalized and thereafter distributions shared equally. Pursuant to a General
Partnership Agreement between NanoVenture and Becton Dickinson Venture, Becton
Dickinson and Nanogen have contributed to the Partnership their respective
rights under the Prior R&D Agreement, certain Intellectual Property Licenses
and, as of December 31, 1997, cash in the aggregate of $1,275,000. Upon the
successful completion of certain defined milestones by December 31, 1997 and
June 30, 1998, contributions for use in the research programs aggregating
approximately $6.7 million will be made to the Partnership from July 1, 1998
through April 1, 1999 of which $5.0 million is to be paid by Becton Dickinson
and $1.7 million is to be paid by Nanogen. The December 31, 1997 milestones have
been achieved, however, there can be no assurance that the June 30, 1998
milestones will be achieved in a timely fashion, if at all. The General
Partnership Agreement also contemplates additional research funding aggregating
approximately $14.3 million during the period from July 1, 1999 through April 1,
2001, conditioned upon the achievement of certain milestones to be mutually
agreed upon by the partners. There can be no assurances that the parties will
agree to such milestones, and if agreed upon, there can be no assurances that
such milestones will be achieved in a timely fashion, if at all. In addition to
the above described payments, Becton Dickinson and Nanogen have agreed to
contribute certain additional amounts to fund marketing and manufacturing
startup.
Hoechst AG
In December 1997, the Company entered into an agreement with Hoechst
Corporate Research and Technology, an affiliate of Hoechst AG ("Hoechst"), for
an exclusive research and development collaboration and the establishment of a
joint venture relating to new tools in molecular recognition and Nanogen's
technology. Pursuant to the agreement, the Company has agreed to issue to
Hoechst, upon the achievement of certain milestones, warrants to purchase up to
4% of the Company's common stock based on the number of shares outstanding on
December 5, 1997, at a price based on a premium to the then current market
price. The warrants will be exercisable for 5 years from the date of grant.
Additionally, Hoechst has agreed to purchase Company common stock worth an
aggregate of $10.0 million at the public offering price, upon the completion of
this offering. This purchase will be made as part of the Private Placement.
Elan Corporation, plc
In December 1997, the Company entered into an agreement with Elan
Corporation, plc ("Elan") for a non-exclusive research and development agreement
for the development of genomics and gene expression research tools. Pursuant to
the agreement, Elan has agreed to purchase Company common stock worth an
aggregate of $5.0 million at the public offering price, upon the completion of
this offering. This purchase will be made as part of the Private Placement.
F-15
<PAGE> 84
NANOGEN MICROCHIP EXPERIMENTAL DESIGNS
[Photo of Nanogen Microchips]
The microchip designs illustrated above are representative of various
experimental prototypes designed by Nanogen. Several of these designs are
currently being used to further develop Nanogen's prototype assay system. Future
commercial production designs may differ from those depicted above based upon
advances in materials and design and fabrication techniques and will be driven
by specific product applications.
<PAGE> 85
Nanogen logo
<PAGE> 86
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the securities
being registered hereby, other than underwriting discounts and commissions. All
amounts are estimated except the Securities and Exchange Commission registration
fee, the National Association of Securities Dealers, Inc. filing fee and the
Nasdaq listing fee.
<TABLE>
<CAPTION>
PAYABLE BY
REGISTRANT
----------
<S> <C>
SEC registration fee.............................................. $ 11,800
National Association of Securities Dealers, Inc. filing fee....... 4,500
Nasdaq listing fee................................................ 50,000
Blue Sky fees and expenses........................................ 10,000
Accounting fees and expenses...................................... 200,000
Legal fees and expenses........................................... 300,000
Printing and engraving expenses................................... 175,000
Registrar and Transfer Agent's fees............................... 5,000
Miscellaneous fees and expenses................................... 143,700
--------
Total................................................... $900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article XI of the Registrant's
Restated Certificate of Incorporation (Exhibit 3.(i)(2) hereto) and Article 6 of
the Registrant's Bylaws (Exhibit 3.(ii)(2) hereto) provide for indemnification
of the Registrant's directors, officers, employees and other agents to the
extent and under the circumstances permitted by the Delaware General Corporation
Law. The Registrant has also entered into agreements with its directors and
officers that will require the Registrant, among other things, to indemnify them
against certain liabilities that may arise by reason of their status or service
as directors or executive officers to the fullest extent not prohibited by law.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by
the Underwriters of the Registrant, its directors and officers, and by the
Registrant of the Underwriters, for certain liabilities, including liabilities
arising under the Act, and affords certain rights of contribution with respect
thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since February 1, 1994, the Registrant has sold and issued the following
unregistered securities:
(a) In February, March and June, 1995 the Registrant issued (i)
2,129,667 shares of Series A Convertible Preferred Stock to a total of 28
accredited investors at a price per share of $1.50, for an aggregate
consideration of $3,194,501 and (ii) 210,000 shares of Series B Convertible
Preferred Stock in exchange for cancellation of indebtedness in the amount
of $315,000. The Registrant relied on the exemption provided by Rule 506
under Regulation D and Section 4(2) of the Act.
(b) Between April 1995 and August 1997, the Registrant issued to a
total of 33 accredited investors (i) 3,740,600 shares of Series B
Convertible Preferred Stock and warrants for the purchase of 60,000 shares
of Series B Convertible Preferred Stock, at an exercise price of $1.50 per
share, in exchange for cancellation of indebtedness in the amount of
$600,000. The Registrant relied on the exemption provided by Rule 506 under
Regulation D and Section 4(2) of the Act.
(c) In December 1996, the Registrant issued to accredited investors
(i) 4,225,000 shares of Series C Convertible Preferred Stock at a price per
share of $4.00, for an aggregate consideration of
II-1
<PAGE> 87
$26,214,392 and (ii) 505,161 shares of Series C Convertible Preferred Stock
in exchange for cancellation of indebtedness in the amount of $2,020,644.
In January 1997, the Registrant issued to accredited investors 1,823,437
shares of Series C Convertible Preferred Stock a price per share of $4.00,
for an aggregate consideration of $7,293,748. The Registrant relied on the
exemption provided by Rule 506 under Regulation D and Section 4(2) of the
Act.
(d) In May and August 1997, the Registrant issued 1,050,000 shares of
Series D Convertible Preferred Stock to a total of three accredited
investors at a price per share of $6.00, for an aggregate consideration of
$6,300,000. The Registrant relied on the exemption provided by Rule 506
under Regulation D and Section 4(2) of the Act.
(e) In January 1998, the Registrant issued an aggregate of 200,000
shares of Series D Preferred Stock to the shareholders of Nanotronics, Inc.
("Nanotronics") in exchange for all of the outstanding shares of
Nanotronics. The Registrant relied on the exemption provided by Rule 506
under Regulation D and Section 4(2) of the Act.
(f) On various dates between December 1994 and December 1997, the
Registrant issued 3,555,739 shares of its Common Stock to approximately 90
employees and directors pursuant to the exercise of options granted under
the 1993 Stock Plan, the 1995 Stock Option/Issuance Plan and the 1997 Stock
Incentive Plan. The exercise prices per share ranged from $.005 to $.60,
for an aggregate consideration of $1,319,890. The Registrant relied on the
exemption provided by Rule 701 under the Act.
The recipients of the above-described securities represented their
intention to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate legends were affixed to the stock certificates
and warrants issued in such transactions. All recipients had adequate access,
through employment or other relationships, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(b) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- --------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1* Agreement and Plan of Merger among the Registrant, Nanotronics, Inc.
("Nanotronics") and the shareholders of Nanotronics, dated as of December 18,
1997.
3.(i)1* Restated Certificate of Incorporation.
3.(i)2* Form of Restated Certificate of Incorporation, to be filed upon the closing of
the offering to which this Registration Statement relates.
3.(ii)1* Bylaws of the Registrant.
3.(ii)2* Form of Amended and Restated Bylaws of the Registrant, to be effective upon the
closing of the offering to which this Registration Statement relates.
4.1 Form of Common Stock Certificate.
5.1** Legal opinion of Pillsbury Madison & Sutro LLP.
10.1* Nanophore, Inc. 1993 Stock Option Plan.
10.2* Nanogen, Inc. 1995 Stock Option/Stock Issuance Plan.
10.3* 1997 Stock Incentive Plan of Nanogen, Inc. ("1997 Plan").
10.4* Form of Incentive Stock Option Agreement under the 1997 Plan.
10.5* Form of Nonqualified Stock Option Agreement under the 1997 Plan.
10.6* Nanogen, Inc. Employee Stock Purchase Plan.
10.7* Form of Indemnification Agreement between the Registrant and its directors and
executive officers.
10.8*(+) Agreement between the Registrant and E( 1/8)lan Corporation, plc dated December
19, 1997.
10.9*(+) Agreement between the Registrant and Hoechst AG, dated December 4, 1997.
</TABLE>
II-2
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- --------------------------------------------------------------------------------
<C> <S>
10.10*(+) Agreement between the Registrant and Syntro Corporation, dated of November 24,
1997.
10.11*(+) Master Agreement between the Registrant and Becton, Dickinson and Company, dated
as of October 1, 1997, with related attachments.
10.12*(+) Exclusive Option Agreement between the Registrant and Billups-Rothenberg, Inc.,
dated as of September 12, 1997.
10.13*(+) Sponsored Research Agreement between the Registrant and Prolinx, Inc, dated as
of December 18, 1996.
10.14*(+) Collaborative Research Agreement between the Registrant and The University of
Texas Southwestern Medical Center at Dallas, dated as of August 1, 1995.
10.15*(+) License Agreement between the Registrant and The Salk Institute for Biological
Studies, dated as of April 1, 1993.
10.16* Series D Preferred Stock Purchase Agreement between the Registrant and Becton,
Dickinson and Company, dated as of May 5, 1997.
10.17* Form of Series B Preferred Stock Purchase Warrant, between the Registrant and
certain purchasers of its Series B Preferred Stock, dated April 11, 1995.
10.18* Amended and Restated Investors' Rights Agreement between the Registrant and
certain securityholders set forth therein, dated as of May 5, 1997.
10.19* Master Lease Agreement between the Registrant and Mellon US Leasing, dated
September 11, 1997.
10.20* Lease Agreement between the Registrant and LMP Properties, Ltd., dated June 29,
1994.
10.21* Lease Agreement between the Registrant and Lease Management Services, Inc.,
dated April 26, 1994, as amended on December 13, 1994 and June 13, 1996.
10.22* Form of Nanogen, Inc. Restricted Stock Issuance Agreement between the Registrant
and certain of its directors and executive officers, dated as of November 7,
1997.
10.23* Form of Promissory Note between the Registrant and certain of its executive
officers, dated August 22, 1996.
10.24* Form of Promissory Note between the Registrant and certain of its executive
officers, dated June 30, 1995.
10.25* Form of Common Stock Purchase Agreement.
10.26* Forms of Performance Stock Option Agreement.
10.27* Agreement between the Registrant and Tina S. Nova, Ph.D., dated January 5, 1994.
10.28* Agreement between the Registrant and W. J. Kitchen, dated October 28, 1997.
10.29* Agreement between the Registrant and James P. O'Connell, Ph.D., dated November
15, 1994.
10.30* Agreement between the Registrant and Harry J. Leonhardt, dated May 24, 1996.
10.31 Agreement between the Registrant and Kieran T. Gallahue, dated December 18,
1997.
11.1 Statement of computation of net loss per share.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2** Consent of Pillsbury Madison & Sutro LLP (included in Exhibit 5.1).
23.3 Consent of Lyon & Lyon LLP.
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
+ Certain portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
II-3
<PAGE> 89
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not applicable or not
required or because the information is included elsewhere in the Financial
Statements or the notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) It will provide to the underwriters at the closing(s) specified in
the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
II-4
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
State of California, on the 22nd day of January, 1998.
NANOGEN, INC.
By: /s/ HOWARD C. BIRNDORF
------------------------------------
Howard C. Birndorf
Chairman of the Board,
Chief Executive Officer
and Chief Financial Officer
Pursuant to the requirements of
the Securities Act of 1933, this
Amendment to Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ----------------------------------- ----------------------------------- ------------------
<S> <C> <C>
/s/ HOWARD C. BIRNDORF Chairman of the Board, Chief January 22, 1998
- ----------------------------------- Executive Officer and Chief
Howard C. Birndorf Financial Officer (Principal
Executive Officer and Principal
Financial Officer)
/s/ DANA A. KRZYSTON Controller (Principal Accounting January 22, 1998
- ----------------------------------- Officer)
Dana A. Krzyston
/s/ TINA S. NOVA, PH.D. President and Chief Operating January 22, 1998
- ----------------------------------- Officer, Director
Tina S. Nova, Ph.D.
* Director January 22, 1998
- -----------------------------------
Brook H. Byers
* Director January 22, 1998
- -----------------------------------
Robert E. Curry, Ph.D.
* Director January 22, 1998
- -----------------------------------
Cam L. Garner
* Director January 22, 1998
- -----------------------------------
David Ludvigson
* Director January 22, 1998
- -----------------------------------
Thomas G. Lynch
* Director January 22, 1998
- -----------------------------------
Andrew E. Senyei, M.D.
*/s/ HARRY J. LEONHARDT
- -----------------------------------
Attorney-In-Fact
</TABLE>
II-5
<PAGE> 91
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- --------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1* Agreement and Plan of Merger among the Registrant, Nanotronics, Inc.
("Nanotronics") and the shareholders of Nanotronics, dated as of December 18,
1997.
3.(i)1* Restated Certificate of Incorporation.
3.(i)2* Form of Restated Certificate of Incorporation, to be filed upon the closing of
the offering to which this Registration Statement relates.
3.(ii)1* Bylaws of the Registrant.
3.(ii)2* Form of Amended and Restated Bylaws of the Registrant, to be effective upon the
closing of the offering to which this Registration Statement relates.
4.1 Form of Common Stock Certificate.
5.1** Legal opinion of Pillsbury Madison & Sutro LLP.
10.1* Nanophore, Inc. 1993 Stock Option Plan.
10.2* Nanogen, Inc. 1995 Stock Option/Stock Issuance Plan.
10.3* 1997 Stock Incentive Plan of Nanogen, Inc. ("1997 Plan").
10.4* Form of Incentive Stock Option Agreement under the 1997 Plan.
10.5* Form of Nonqualified Stock Option Agreement under the 1997 Plan.
10.6* Nanogen, Inc. Employee Stock Purchase Plan.
10.7* Form of Indemnification Agreement between the Registrant and its directors and
executive officers.
10.8*(+) Agreement between the Registrant and E( 1/8)lan Corporation, plc dated December
19, 1997.
10.9*(+) Agreement between the Registrant and Hoechst AG, dated December 4, 1997.
10.10*(+) Agreement between the Registrant and Syntro Corporation, dated of November 24,
1997.
10.11*(+) Master Agreement between the Registrant and Becton, Dickinson and Company, dated
as of October 1, 1997, with related attachments.
10.12*(+) Exclusive Option Agreement between the Registrant and Billups-Rothenberg, Inc.,
dated as of September 12, 1997.
10.13*(+) Sponsored Research Agreement between the Registrant and Prolinx, Inc, dated as
of December 18, 1996.
10.14*(+) Collaborative Research Agreement between the Registrant and The University of
Texas Southwestern Medical Center at Dallas, dated as of August 1, 1995.
10.15*(+) License Agreement between the Registrant and The Salk Institute for Biological
Studies, dated as of April 1, 1993.
10.16* Series D Preferred Stock Purchase Agreement between the Registrant and Becton,
Dickinson and Company, dated as of May 5, 1997.
10.17* Form of Series B Preferred Stock Purchase Warrant, between the Registrant and
certain purchasers of its Series B Preferred Stock, dated April 11, 1995.
10.18* Amended and Restated Investors' Rights Agreement between the Registrant and
certain securityholders set forth therein, dated as of May 5, 1997.
10.19* Master Lease Agreement between the Registrant and Mellon US Leasing, dated
September 11, 1997.
10.20* Lease Agreement between the Registrant and LMP Properties, Ltd., dated June 29,
1994.
10.21* Lease Agreement between the Registrant and Lease Management Services, Inc.,
dated April 26, 1994, as amended on December 13, 1994 and June 13, 1996.
</TABLE>
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- --------------------------------------------------------------------------------
<C> <S>
10.22* Form of Nanogen, Inc. Restricted Stock Issuance Agreement between the Registrant
and certain of its directors and executive officers, dated as of November 7,
1997.
10.23* Form of Promissory Note between the Registrant and certain of its executive
officers, dated August 22, 1996.
10.24* Form of Promissory Note between the Registrant and certain of its executive
officers, dated June 30, 1995.
10.25* Form of Common Stock Purchase Agreement.
10.26* Forms of Performance Stock Option Agreement.
10.27* Agreement between the Registrant and Tina S. Nova, Ph.D., dated January 5, 1994.
10.28* Agreement between the Registrant and W. J. Kitchen, dated October 28, 1997.
10.29* Agreement between the Registrant and James P. O'Connell, Ph.D., dated November
15, 1994.
10.30* Agreement between the Registrant and Harry J. Leonhardt, dated May 24, 1996.
10.31 Agreement between the Registrant and Kieran T. Gallahue, dated December 18,
1997.
11.1 Statement of computation of net loss per share.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2** Consent of Pillsbury Madison & Sutro LLP (included in Exhibit 5.1).
23.3 Consent of Lyon & Lyon LLP.
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
+ Certain portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
<PAGE> 1
EXHIBIT 4.1
NUMBER SHARES
[Logo]
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR CERTAIN DEFINITIONS AND A
IN THE CITY OF BOSTON, MA STATEMENT AS TO THE RIGHTS, PREFERENCES,
OR NEW YORK, NY PRIVILEGES AND RESTRICTIONS ON SHARES
CUSIP 630075 10 9
This Certifies That
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE PER
SHARE, OF
NANOGEN, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
DATED:
/s/ Harry J. Leonhardt, Esq [SEAL] /s/ Tina S. Nova, Ph.D.
SECRETARY PRESIDENT AND CHIEF
OPERATING OFFICER
COUNTERSIGNED AND REGISTERED:
BANKBOSTON, N.A.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge at
the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ________________________Custodian_________________________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act_______________________________________________________
in common (State)
UNIF TRF MIN ACT - _______________________Custodian (until age_______________)
(Cust)
___________________________________under Uniform Transfers
(Minor)
to Minors Act_____________________________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_________________________________________
_________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _________________
X______________________________________
X______________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
By_____________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 10.31
December 16, 1997
Kieran T. Gallahue
10 Abby Road
Westford, MA 01886
Dear Kieran:
Nanogen Incorporated ("Nanogen") is pleased to offer you the position of Vice
President, Strategic Marketing with Nanogen Incorporated and the following terms
encompass our offer. The effective date of this position will be as soon as
possible, but not later than February 1, 1998. If you accept this offer, you
will be an exempt employee reporting to me, Nanogen's CEO.
You will be located in our San Diego office, and as Vice President, will be
responsible for directing marketing, strategic planning and related activities.
You will be expected to devote your full-time efforts to these responsibilities,
and you will be compensated at an annual base rate of $225,000 per annum payable
in equal, semi-monthly increments.
As a Vice President, you will be a participant in Nanogen's Executive Incentive
Compensation Plan. As part of this plan, you will be eligible for a bonus of
$40,000 for 1998. All bonuses are based on annual milestones which would be
mutually agreed upon between you and me, and subject to Board of Directors'
approval
Upon your acceptance of this proposal, you will be entitled to purchase 200,000
shares of Nanogen common stock at fair market value, as determined by Nanogen's
Board. The purchase will be made through the signing of Nanogen's current form
of Stock Purchase Agreement. Of such shares, 175,000 will vest ratably on a
monthly basis over the four-year period starting on your first day of
employment, except that you will not be vested in the initial 25% of such shares
until your first anniversary of employment. The remaining 25,000 of such shares
("Milestone Shares") will vest in equal annual installments over six years as
predetermined annual milestones are attained. Such milestones will be mutually
agreed upon, subject to Board approval. If the milestones for the year have been
attained, then the Milestone Shares that vest for such year thereafter shall not
be subject to repurchase by Nanogen at the original purchase price. If you
resign during the first 12 month period of your employment, no Milestone Shares
will vest. Thereafter, if you resign during the first half of a calendar year,
no Milestone Shares will vest for such year. If you resign during the second
half of a calendar year, you will vest in a pro rata portion of the Milestone
Shares that otherwise would have vested during such year (based on attainment of
the applicable milestones). Such
<PAGE> 2
Kieran Gallahue
December 16, 1997
Page 2
portion shall be a fraction equal to the number of completed months of work
during such year divided by 12.
You will be eligible to participate in all Company-sponsored benefits upon your
date of hire. At present, these include full medical, dental and vision
insurance coverage for yourself, with the option to include your family with a
minimal contribution. In addition, you will be eligible to participate in our
life and long-term disability insurance as well as our 401(k) plans
(non-employer contributing) as well as our 125 Flexible Benefits Program.
You will be eligible for relocation benefits consistent with your employment
level at Nanogen as specified by Nanogen's 1997-98 Executive Relocation
Guidelines, a copy of which is enclosed. In summary, relocation includes full
coverage of the cost of relocating your household to San Diego, and the
provision of temporary housing for up to five months.
As an additional benefit, when your family moves to San Diego, the Company will
provide you with up to a $40,000 loan at the lowest interest rate allowable by
law to go toward the purchase of your new home. This loan will be forgivable
over four years and secured by Nanogen stock. In addition, for a period of 36
months from the time at which you purchase a new home in San Diego, the Company
will provide you with a mortgage differential of up to a maximum of $1,000 per
month for year one, $750 per month for year two, and $500 per month for year
three. That is, the difference between your current base mortgage and your new
base mortgage. It is understood that you will be responsible for all tax
consequences of these benefits.
The Company also agrees to provide you with a severance package of up to six
months, should your employment be terminated without cause during your first
year of employment. For the purpose of this letter, the phrase "termination
without cause" shall mean a termination of your employment by Nanogen for any
reason other than: 1) the repeated and willful failure by you to perform your
reasonably assigned duties on behalf of Nanogen; 2) the repeated gross
negligence by you in carrying out your duties; 3) illegal conduct by you in
carrying out your duties; 4) the repeated refusal by you to comply with the
reasonable and lawful instructions of the Board; or 5) repeated and willful
actions by you contrary to Nanogen's best interests.
Employment with Nanogen will not be for a specific term and can be terminated by
you or by the Company at any time for any reason, with or without cause and with
or without notice. Any contrary representations, agreements, or promises of any
kind, whether written, oral, expressed or implied which may have been made or
which may
<PAGE> 3
Kieran Gallahue
December 16, 1997
Page 3
be made to you are/will be superseded by this offer. We request that all Nanogen
employees, to the extent possible, give advance notice if they intend to resign.
If you accept the offer, the terms described in this letter will be the terms of
your employment. Any additions or modifications of these terms must be in
writing and signed by you and Nanogen's Chief Executive Officer.
As an obligation consistent with the offer of employment, you will be required
to sign the enclosed Blood Consent Form, and the Proprietary Information and
Inventions Agreement; and on your first day of employment, to provide the
Company with the legally required proof of your identity and authorization to
work in the United States.
Assuming this letter is acceptable to you, please sign a copy and return it to
me. This offer will terminate unless accepted by December 31, 1997. We are very
excited that you will be joining Nanogen. Howard, myself, our Board Members and
employees look forward to announcing your appointment.
Sincerely yours,
/s/ TINA S. NOVA
- ---------------------------------------
Tina S. Nova, Ph.D.
President and Chief Operating Officer
Enclosures
I accept this offer under the terms and conditions set forth in this letter.
/s/ KIERNAN T. GALLAHUE December 18, 1997
- --------------------------------------- -------------------------
Kieran T. Gallahue Date
<PAGE> 4
Nanogen Incorporated
Relocation Guidelines
1997-98
New, salaried exempt employees are eligible for relocation assistance.
Moving An Employee From One Location To Another
- -----------------------------------------------
The Company will reimburse certain expenses connected with the movement of
employee households provided the distance test for relocation, as set forth in
the Internal Revenue Code, Section 217(c), is met.
Internal Revenue Service Guidelines
- -----------------------------------
Relocation expenses are tax deductible if the employee's move increases
commuting distance by at least 35 miles. If the employee is not employed prior
to the move, the new location must be at least 35 miles from his/her residence.
Administration of the Program
- -----------------------------
Administration of the program will be the responsibility of the Director of
Human Resources. Under no circumstances may any company employee allow or imply
reimbursement of a relocation expense not explicitly set forth in this policy,
except as provided below.
ALL OFFERS THAT INCLUDE RELOCATION ASSISTANCE REQUIRE THE PRIOR WRITTEN APPROVAL
OF THE PRESIDENT.
The Company Will Pay For The Following:
- ---------------------------------------
The Company will pay for the shipment of normal household goods. This includes
packing, crating, van transportation, unpacking, insurance coverage (replacement
value) and storage charges for up to 90 days. Expenses are limited to those
associated with one pick-up and delivery and one access to storage. In addition,
the employee may ship one automobile whether shipped with household goods or
driven.
The Company will also cover reasonable expenses of disconnecting and connecting
major appliances, if on the moving bill. Expenses of alteration to the dwelling
and extensions of utility lines, etc., are not reimbursable.
The Company will pay for the cost of coach air tickets on the following basis
for use on home finding and final transportation:
o Up to two round-trip tickets for use by either employee or spouse in
home finding or return visits
o One, one-way trip ticket for employee, spouse and members of the
immediate family for final transportation.
The Company will also pay for any reasonable cost of transportation to and from
the airport including the company mileage rate plus tolls and parking.
<PAGE> 5
Nanogen Incorporated
Relocation Guidelines
Page 2
As an alternative to public transportation the employee may use his/her personal
car and be reimbursed at the company mileage rate (reimbursement rate is
currently 31 cents per mile) plus tolls and parking.
Reimbursement For Final Transportation
- --------------------------------------
Reimbursement for final transportation must be based on the most direct route.
In addition to the above, the Company will reimburse the employee for up to 10
days of car rental if needed in the new location for home finding and temporary
establishment.
Home Finding Visit
- ------------------
The Company will pay reasonable lodging at a Company designated hotel and meals
expenses for up to 5 days for the employee and spouse.
Final Move
- ----------
The Company will pay reasonable lodging and meal expenses for up to 10 days for
the employee, spouse and members of the immediate family.
Executive Benefits
- ------------------
o Executive employees are provided with the following additional moving
allowances:
o Two automobiles - may be moved whether shipped with household goods or
driven. Temporary housing - the Company will arrange for temporary housing
for up to five months.
o Incidental Expenses - the Company will reimburse up to $5,000 in incidental
expenses associated with relocation.
o Sale of former house / purchase of new home - real estate commissions up to
6% of the sales prices and reasonable closing costs, including one point,
will be reimbursed provided the sale occurs within one year of employment
and the employee is actively employed by the Company during the period.
o "Gross ups" to income to offset the income tax liability which may be
incurred due to the moving allowances paid by the Company. The Company will
gross up the employee's salary at the lesser of the actual liability
incurred or 50% of taxable moving expenses.
The Company Will Not Cover The Following:
- -----------------------------------------
The Company will not cover expenses incurred in shipment of animals, boats,
RV's, trailers, snow mobiles, plants, swing sets, above-ground swimming pools,
construction materials and other items requiring special handling.
<PAGE> 6
Nanogen Incorporated
Relocation Guidelines
Page 3
Pro-rata Repayment
An employee will be responsible for repaying a pro-rata portion of all
relocation expenses incurred by Nanogen on his/her behalf if the employee
voluntarily terminates employment with the Company within 12 months of hire. The
employee will be required to agree to this provision, in writing, at the time
the offer of employment is accepted (see Attachment "A"). The Company may decide
to waive this provision at its discretion.
Reimbursement Policy
The employee should be informed, in writing, of the relocation assistance they
will receive at the time the offer letter is issued. Any questions regarding the
relocation policy should be discussed with the Vice President, Finance or
Director of Human Resources prior to making the offer.
After notification of the new employee's date to begin work, the Director of
Human Resources shall notify the moving company to contact the employee directly
regarding details of the shipment of the employee's household goods.
The employee shall submit an Expense Report with receipts for all relocation
expense reimbursements to the Director of Human Resources for approval.
After approval by the Director of Human Resources and the appropriate department
Vice President, forward the approved Expense Report to Payroll for payment to
the employee.
<PAGE> 7
Nanogen Incorporated
Relocation Guidelines
Page 4
Attachment "A"
NANOGEN INCORPORATED
AGREEMENT FOR REPAYMENT
OF PRO-RATA MOVING EXPENSES
I, Kieran Gallahue, agree that if I voluntarily terminate my employment within
12 months of my first day of work with Nanogen Incorporated ("Nanogen"), I will
repay to Nanogen, on a pro-rata basis, the actual total costs incurred by
Nanogen to move me and my family (if applicable) to San Diego. The pro-rata
calculation will be based upon the number of days of employment with Nanogen
divided by 365 days times the total costs described below.
1. Movement of household goods and automobile, if shipped.
2. Trip to locate housing.
3. Payments made to travel to my new location for myself, spouse and
family.
4. Temporary housing in San Diego.
5. Reimbursed incidental expenses.
6. Real estate commissions and closing costs.
/s/ KIERNAN T. GALLAHUE December 18, 1997
- ------------------------------------------- ----------------------
Signature Date
<PAGE> 1
EXHIBIT 11.1
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years ended December 31,
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
HISTORICAL NET LOSS PER SHARE:
Net loss $(4,588) $(7,778) $(11,141)
======= ======= ========
Weighted average common shares
outstanding 1,753 2,254 2,749
Adjustments to reflect requirements
of the Securities and Exchange
Commission (Effect of SAB 83) 5,206 5,206 5,206
------- ------- --------
Adjusted shares outstanding 6,959 7,460 7,955
======= ======= ========
Historical net loss per share $ (0.66) $ (1.04) $ (1.40)
======= ======= ========
<CAPTION>
Years ended December 31,
1996 1997
------- --------
PRO FORMA NET LOSS PER SHARE:
Net loss $(7,778) $(11,141)
======= ========
Weighted average common shares outstanding 2,254 2,749
Effect of assumed conversion at original
date of issuance of preferred shares,
excluding 7,629 shares which are included
in the Adjustments to reflect requirements
of the Securities and Exchange Commission
(Effect of SAB 83) 5,999 6,055
Adjustments to reflect requirements of
the Securities and Exchange Commission
(Effect of SAB 83) 5,206 5,206
------- --------
Adjusted shares outstanding 13,459 14,010
======= ========
Pro forma net loss per share $ (0.58) $ (0.80)
======= ========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated January 16, 1998,
in Amendment No. 1 to the Registration Statement (Form S-1 No. 333-42791) and
related Prospectus of Nanogen, Inc. for the registration of shares of its common
stock.
/s/ ERNST & YOUNG LLP
San Diego, California
January 22, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF COUNSEL
Lyon & Lyon consents to the reference to it under the caption EXPERTS in
the Registration Statement and related Prospectus of Nanogen, Inc. for the
registration of Nanogen's common stock.
Date: January 23, 1998 By: /s/ DAVID B. MURPHY
-----------------------------------
David B. Murphy
Partner
LYON & LYON LLP
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 16,775,228 19,498,293
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 17,329,246 20,197,888
<PP&E> 1,998,939 3,650,721
<DEPRECIATION> 683,399 1,210,780
<TOTAL-ASSETS> 19,090,278 23,215,063
<CURRENT-LIABILITIES> 2,476,141 3,422,843
<BONDS> 1,508,185 1,997,716
0 0
10,785 13,684
<COMMON> 2,749 4,775
<OTHER-SE> 15,666,059 18,580,540
<TOTAL-LIABILITY-AND-EQUITY> 19,090,278 23,215,063
<SALES> 0 0
<TOTAL-REVENUES> 1,644,078 3,365,722
<CGS> 0 0
<TOTAL-COSTS> 9,358,458 15,481,728
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 63,957 (975,222)
<INCOME-PRETAX> (7,778,337) (11,140,784)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,778,337) (11,140,784)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,778,337) (11,140,784)
<EPS-PRIMARY> (.58) (.80)
<EPS-DILUTED> 0 0
</TABLE>
